Frequently Asked Questions
NONPROFIT CORPORATION
- What is a nonprofit corporation?
- How can a nonprofit corporation be formed?
- What purposes are valid for a nonprofit corporation?
- What forms need to be filed to apply for federal tax-exempt status?
- When must form 1023 be filed?
- How many directors are nonprofit corporations required to have?
- What are the advantages of forming a nonprofit corporation?
- What are the disadvantages of forming a nonprofit corporation?
What is a nonprofit corporation?
A nonprofit corporation (whether incorporated or as an unincorporated association) is an organization in which no part of the income is distributable to its members, directors, or officers. The corporation is not prohibited from making a profit; the prohibition is the distribution of any profits to members, officers, or directors of the organization. Nonprofit corporations are formed pursuant to state law. Nonprofit corporations must apply for exempt status, both at the federal and state level.
How can a nonprofit corporation be formed?
In most states, the first step is the filing of articles of incorporation with the secretary or state. The statutes of the state of incorporation determine the contents of the articles of incorporation.
After filing of the articles of incorporation, tax-exempt status must be applied for at both the federal and state levels.
The nonprofit corporation must conform to corporate formalities by holding annual meetings of directors and members. Bylaws have to be adopted, which is an agreement or contract between the corporation and its members to conduct the affairs of the corporations.
What purposes are valid for a nonprofit corporation?
A nonprofit corporation formed under IRS code Section 501(c)(3) may be formed and organized to operate for some religious, educational, literary, charitable, or scientific purpose. It must be noted that a nonprofit corporation may also be formed for other purposes pursuant to various other sections of the IRS code.
What forms need to be filed to apply for federal tax-exempt status?
For a nonprofit corporation seeking federal tax-exempt status under Section 501(c)(3), a timely filing of IRS form 1023 must be made. It must be noted that a few groups are NOT required to file form 1023.
Form 1023 must be filed in a timely manner. IRS form 1023 must be filed within 15 months of the date the corporation's articles of incorporation were filed.
How many directors are nonprofit corporations required to have?
Most states require nonprofit corporations to have at least three directors. But some states allow for only one director and some others allow for less than three members.
What are the advantages of forming a nonprofit corporation?
Under Internal Revenue Code Section 501(c)(3) a nonprofit corporation is eligible for certain federal tax exemptions, which can amount to significant, tax savings.
A Section 501(c)(3) nonprofit corporation is qualified to receive both public and private grants.
Just like a for-profit corporation, nonprofit corporations receive the same limited liability protection. Thus, the directors, trustees, and officers of a nonprofit corporation are not personally liable for the debts and liabilities of the corporation.
Other advantages include;
- a nonprofit corporation is an entity with perpetual existence and so the corporation's life is not dependent upon its members.
- nonprofit corporations under section 501 (c)(3) receive lower postal rates on bulk mailings.
- many organizations offer discounted rates for advertising for nonprofit corporations.
What are the disadvantages of forming a nonprofit corporation?
The main disadvantage would be an increase in the paperwork. Articles of incorporation must be prepared and filed with the appropriate state agency, bylaws have to prepared, and minutes have be maintained and certain federal and state tax exemptions must be timely filed to obtain a tax-exempt status.