When Is it Helpful to Register As a Non-Profit Corporation?

by Phil M. Fowler
Charitable organizations can benefit from nonprofit incorporation.

Charitable organizations can benefit from nonprofit incorporation.

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It can be helpful to register as a nonprofit corporation if you run a business, activity or organization that serves a purpose other than creating profits, particularly if the activity generates income, relies on public donations, or involves multiple individuals to carry out. If your organization does not register as a nonprofit corporation, then it will have to function as either an unincorporated association or a for-profit corporation. Registering as a nonprofit corporation can provide significant benefits over operating as an unincorporated association. The big disadvantage with registering as a nonprofit corporation, as opposed to a for-profit corporation, is that the owners of the corporation cannot receive payments of profits or dividends from the business.

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Multiple Members

It might be helpful to register as a nonprofit corporation if several different people help operate your organization. Registering as a nonprofit corporation can help formalize roles, duties and responsibilities within the organization. Additionally, registering as a nonprofit corporation provides a layer of legal protection for the multiple owners, directors and employees of the organization. For instance, if an unincorporated charitable association holds a public event where one of the guests gets injured, the members of the association may be personally responsible to compensate that injured individual. If, on the other hand, the members formed a nonprofit corporation before the injury occurred, the nonprofit corporate entity would be liable for the injuries, not the owners, directors or employees of the corporation.

Tax Exemptions

It may be helpful to register as a nonprofit corporation if your organization or operation generates any significant amount of income. Under individual federal income tax rules enforced by the IRS, the operator of an unincorporated association must pay income tax on any income earned by the activities of the association. However, certain nonprofit organizations can apply to the IRS for an exemption from federal income taxes. This can help fuel your organization's activities by allowing you to funnel more money back into the organization's efforts, rather than paying that money to the federal government.

Donation Deductions

One of the best times to consider registering as a nonprofit corporation is when your organization will begin asking for any significant amount of donations or charitable contributions. Nonprofit corporations afforded tax-exempt 501(c)(3) status by the IRS can offer an attractive tax break to people who donate money or property to the corporation. A donation to a tax-exempt nonprofit corporation provides the donor with a tax deduction on her federal income taxes. Donations to for-profit corporations, or unincorporated charitable associations, do not provide the donor with any tax deduction. So if your organization relies on or could benefit from an increase in donations, then it would probably be helpful to file as nonprofit corporation and apply for tax-exempt status.

Goodwill

A final indication that it might be time to register as a nonprofit corporation is when you realize that your organization's efforts could benefit from an improvement in public relations. Public sentiment about nonprofit corporations typically differs from the sentiment about for-profit corporations. The general public often views for-profit corporations as greedy and ruthless, concerned only about the bottom line. Public opinion about nonprofit corporations is much less jaded, since nonprofit corporations, by their very definition, do not worry about profits. Registering as a nonprofit corporation can make it easier to generate public goodwill for your organization, which can help further the charitable, educational, civic, or religious activities promoted by your organization.