Can an Entertainment Company Be Non-Profit?

By Wayne Thomas

The formation of a nonprofit organization is governed by state law. To take full advantage of beneficial tax treatment at both the state and federal levels, however, a nonprofit needs to go beyond being organized for a reason other than pursuing profits. Whether an entertainment company meets these strict requirements depends on the type of work performed by your organization and who benefits from it.

The formation of a nonprofit organization is governed by state law. To take full advantage of beneficial tax treatment at both the state and federal levels, however, a nonprofit needs to go beyond being organized for a reason other than pursuing profits. Whether an entertainment company meets these strict requirements depends on the type of work performed by your organization and who benefits from it.

Role of Profits

The threshold question in evaluating whether an entertainment company can be formed as a nonprofit is whether the business's purpose is to generate profits. By definition, nonprofit organizations are companies formed for business purposes other than generating a profit. This does not mean that the company cannot generate revenue from its activities, but no founder, director, member or employee may be paid dividends beyond reasonable compensation for their services.

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Charitable Purpose

Although the restrictions for forming a nonprofit are not exclusive, to be considered exempt from federal income taxes, and allow donors to deduct donations, your organization must obtain 501(c)(3) tax exempt status from the Internal Revenue Service. This treatment is limited to nonprofits that promote a charitable purpose. The IRS has elaborated that qualifying companies include those that further a specific scientific, educational or religious purpose. Depending on the purpose of your entertainment company, this could be a difficult obstacle to overcome. An example might be if you were organized to offer free documentary film screenings to low-income children.

Additional Requirements

Your entertainment company also must meet additional requirements outlined by the IRS. First, the organization must not conduct any political lobbying efforts or attempt to influence any piece of legislation or the election of a candidate. For example, your organization could not voice its opposition to a legislator who seeks to limit free speech in the film industry. You also must describe to the IRS how you plan to distribute company assets after your organization stops doing business. By law, the property must be distributed to another tax exempt nonprofit.

State Requirements

The process for establishing tax relief at the state level can vary from state to state. Typically, obtaining the federal exemption automatically qualifies you for the state income tax exemption, but a separate application and review process may be required for sales and property taxes. In Iowa, for example, sales tax exemptions are only granted to organizations furthering an educational or government purpose. By contrast, in Texas most charitable organizations qualify for the sales tax exemption. In addition, some states have specific requirements that must be observed when you are forming your nonprofit. In Texas, for example, you must have at least three directors serving on the board. By contrast, Pennsylvania only requires one director.

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How to Register a Nonprofit Organization in Iowa

References

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Forms for Applying for Non-Profit Status

Applying for nonprofit status operates according to state law. Following formation, your organization may then qualify for certain tax exemptions, which may be pursued first at the federal level and then at the local level. Knowing what forms you need to file, and the content that needs to be in the forms, will help ensure you avoid delays in the establishment of your nonprofit.

Rules for 501(c)3 Corporations

Many charities pursue 501(c)(3) status because it allows organizations to avoid certain taxes and accept tax-deductible donations. The Internal Revenue Service grants 501(c)(3) status to charitable organizations that meet the requirements set forth in the Internal Revenue Code. While charities are first organized under state law, the IRC restricts the activities and profit distributions of 501(c)(3) organizations, also known as exempt organizations.

Non-Profit Fundraising in the State of Florida

The life of a nonprofit hinges on its ability to collect donations. In Florida, most nonprofits are subject to specific reporting and filing requirements. Further, additional reporting and tax implications come into play if the organization has been deemed exempt from federal income taxes. Knowing which organizations are subject to the reporting laws, as well as understanding what activities constitute solicitation, will help ensure the success of your nonprofit.

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