Nonprofits benefit from incorporation in different ways than for-profit businesses. While for-profit companies take advantage of tax savings and asset protection when they incorporate, nonprofits gain even more benefits from a tax standpoint.
Incorporating a nonprofit organization has several advantages, but the corporation must meet particular requirements to fulfill the IRS’s definition of nonprofit. In particular, the nonprofit must meet certain specifications when it comes to drafting its articles of incorporation. Unfortunately, many state forms do not have the correct language to meet the IRS’s requirements, which can result in forgoing tax-exempt status that your nonprofit may have otherwise been entitled to receive.
You may have heard of the term “501(c)(3) organization.” These organizations are the most common type of charitable group, and they are usually what we think of when we hear the term “nonprofit.”
The Tax Code Section 501(c) covers nonprofits generally. Under that code section, there are 27 types of nonprofits that receive some kind of exemption from federal incomes taxes. Section 501(c)(3) covers most charitable groups that serve the following purposes:
They also have a catch-all “charitable” description. As such, this particular code section covers a broad range of organizations. Examples of “charitable” purposes include anything that will be beneficial to the public interest, such as:
There are two types of charities that fall under 501(c)(3) status: public charities and private foundations. A private foundation receives income from investments or endowments instead of soliciting funds from the public. In contrast, a public charity will request funds from the general public or the government. Donations must come from a variety of sources instead of just a few donators. As public charities solicit donations from the public, they are often significantly more well-known compared to most private foundations.
It is not a requirement to be incorporated to receive tax-exempt status, but it can make the process easier. Section 501(c)(3) organizations must meet the following exemption requirements:
The entity may also be charged excise or other taxes under certain circumstances. That means that although the company may be exempt from income taxes, it may have to pay other types of taxes.
Incorporating your nonprofit organization will require that you fill out some paperwork and keep up with state-mandated filing requirements. However, incorporating is often well worth the time and effort for nonprofits because of the many money-saving benefits.
Articles of incorporation must be filed by any business that wants to incorporate, regardless of where you incorporate or whether you are considered a for-profit company. Articles of incorporation for nonprofits will set out basic information about your business, including:
This document includes need-to-know information about your nonprofit so that anyone who is seeking basic information about the organization can find it. Once you file your articles of incorporation with the State, it becomes a public record that virtually anyone can access to learn more about your nonprofit.
You cannot be considered a valid corporation under either state or federal law if you do not have articles of incorporation.
Many states offer template forms that you can use to create your articles of incorporation; however, these models are not often not designed with nonprofit organizations in mind. They are often missing vital information that is required for a nonprofit to be tax exempt under Section 501(c)(3).
To meet the IRS’s requirements to become a 501(c)(3) charity, you must set out that your organization will either perform certain duties or refrain from taking specific actions. Your articles of incorporation should explicitly state that:
Keep in mind that you cannot satisfy these requirements even if the terms are set out in the corporate bylaws or other regulations that apply to the company’s internal workings. They must be included in the articles of incorporation (or articles of organization for LLCs). Failing to include these provisions will invalidate your application for 501(c)(3) status.
The requirements of formation of a nonprofit corporation are the same as a for-profit corporation, with a few exceptions. In addition to filing your articles of incorporation, you should also complete the following tasks:
In addition to these more formal legal requirements, there are a lot of practical steps you need to take to form your nonprofit. For example, you will need to consider whether your nonprofit will have a physical location and how you will pay for it. Your nonprofit will also usually need a separate bank account. You should consider who will have access to nonprofit funds and how funding will be restricted (i.e., Will only certain people pay for expenses or will the whole board be able to write checks?).
Just because your articles of incorporation meet IRS standards does not mean that you will automatically be granted tax-exempt status. You must formally apply for the designation through the IRS. Being recognized as a nonprofit at the state level will not necessarily mean that the organization will be exempt from federal taxes.
Most organizations will be required to fill out one of two forms to apply for tax-exempt status: Form 1023, the Application for Recognition of Exemption (for charitable organizations) or Form 1024, Application for Recognition of Exemption (for other tax-exempt organizations). Depending on your type of organization, you may not have to fill out a specific application form and must submit your application by sending a letter with particular information to the IRS.
The application will request basic information about your organization, including:
Some smaller organizations will qualify to file Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. To determine whether you can file this form, you should fill out the Eligibility Worksheet found at the end of the instructions for the form.
Those who can use Form 1023-EZ are limited by the amount of gross receipts (under $50,000 for the prior or next three years), the value of total assets, and formation restrictions. Certain churches, schools, hospitals, and agricultural research organizations will be unable to use this form.
Unfortunately, many nonprofits rely on the forms that their state provides only to find out that their governing documents need to be revised when they apply for tax-exempt status. LegalNature has nonprofit materials that actually meet the state and federal requirements necessary for nonprofit status, regardless of the state in which you want to incorporate. Click here to create your articles of incorporation now.
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