The term "nonprofit" is used to identify any business that is organized to serve a public purpose. That is, a for-profit business sets a purpose of making money for the owners, where a nonprofit business sets a purpose of some charitable idea.
Not all nonprofits need to be organized as a corporation. For example, social groups or activity-based groups (quilt guilds, hunting clubs) may have no need for tax exemption or charitable status, so a basic state registration of the name may sufficient. However, there are significant benefits to incorporating a nonprofit, and any nonprofit that intends to grow or have significant cash flow through should consider taking the extra step to incorporating from the start.
The benefits of incorporating a nonprofit are akin to the benefits of LLC or corporation status of for-profit businesses. These benefits include:
Except for rare, specific instances, the individuals who control a corporation are not liable for legal and financial obligations of the nonprofit. The corporation can incur debts and have legal obligations on its own, without the personal guaranty of its board members. Also, a corporation can own its own property, have its own bank account, and employ staff, all under its own name.
A corporation continues to exist in perpetuity until legal dissolution, unless it is chartered for only a specific, limited period of time. Its existence is not dependent on the individuals involved. For this reason, some businesses, banks, and donors are more likely to deal with nonprofit corporations over unincorporated organizations...it indicates that the nonprofit is not going to end up for personal gain of the founders and will continue to exist on its own merit.
Uniform Set of Rules
Corporations are governed by a uniform, though flexible, set of rules established by state law. Thus, corporations are operated functionally the same and others (board members, staff, donors) know what to expect from the governance of the nonprofit.
Incorporation allows a nonprofit to apply for state and federal tax-exempt status. This means that the money the nonprofit brings in will generally be untaxable. If the nonprofit makes money from an activity unrelated to the stated purpose of the organization, it may be taxable, but general donations, grant funding, and other income directly related to the stated purpose is exempt from taxes.
Incorporation also allows qualified nonprofits to apply for 501(c)(3) status, meaning donors can write their contributions off their taxes. This status is critical if a significant proportion of your income will come from the public or individual donors.
Most nonprofit organizations will benefit from registering as a corporation. In addition to the legal protections, incorporation adds an air of legitimacy to the organization. And, while securing 501(c)(3) status can be tedious, it is well worth the effort for any qualified charitable organization that will seek public funding. Also, most government and private grantmaking agencies prefer to deal with 501(c)(3) status organizations. If your nonprofit idea is likely to grow or branch out from where it starts, incorporating the business and pursuing the appropriate exempt and charitable statuses should begin as early as possible.
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