A nonprofit organization can operate legally without being incorporated, but it can often be advantageous for the organization to formally incorporate. For example, you must have a formal status as a corporation, trust or association to receive tax-exempt status, which will allow your donors to use their donations as tax deductions. Incorporating also limits your personal liability for the organizations activities, protecting your personal assets against lawsuits for actions your organization takes.
Incorporation is a process handled at the state level, so the details of your incorporation will vary depending on your state. For example, some states may require you to obtain approval from regulatory agencies before you can incorporate. You will also need to choose a name for your corporation in accordance with your state’s name guidelines, which may prohibit you from using a name that is too similar to another corporation’s name. If you are establishing a new organization, you may also need to choose board members as well as establish record-keeping and accounting systems.
Articles of Incorporation
Many states provide sample Articles of Incorporation and other documents to help you get started, but these documents may not fit your specific situation, so you may wish to consult with an attorney or online legal services provider prior to filing. For example, the Internal Revenue Service requires certain language in your Articles of Incorporation before your nonprofit can qualify for tax-exempt status. To comply with IRS guidelines, your articles must at least include a statement limiting your nonprofit’s purpose to one of the allowable tax-exempt purposes under the Internal Revenue Code and also must not empower your nonprofit to engage in activities that do not further that purpose.
One benefit of incorporation is obtaining tax-exempt status from the IRS, but this is not automatic. If your organization is organized and operated exclusively for certain purposes, you may apply for tax-exempt status under 501(c)(3) of the Internal Revenue Code. This type of exemption applies to religious, charitable, educational and some other nonprofit corporations, but there are other types of exemptions available if your organization does not fit into this category. To apply for 501(c)(3) status, your nonprofit must file IRS Form 1023 and the appropriate user fee.
Operating Your Nonprofit
Your nonprofit must operate within legal guidelines for corporations and must comply with IRS guidelines for nonprofits. For example, directors of nonprofit corporations -- like directors of for-profit corporations -- owe legal duties of care and loyalty to the organization, which include pursuing the nonprofit’s best interests by avoiding conflicts of interest. Certain federal and state laws — such as whistleblower protection — apply to nonprofits as well as for-profits so you may wish to consult with an attorney about the laws applicable to your particular corporation. Additionally, because of IRS rules, your nonprofit will lose its 501(c)(3) status if it engages in certain political activity such as contributing to a political campaign.
References & Resources
- FindLaw: Top Five Reasons to Incorporate a Non-Profit Organization
- Internal Revenue Service: Tax-Exempt Status for Your Organization
- Foundation Group: How Do We Incorporate a Nonprofit?
- Foundation Center: Establishing a Nonprofit Organization
- Society of Corporate Secretaries & Governance Professionals: Governance for Nonprofit Organizations
- Board Source: Starting a Nonprofit Organization
- Jupiterimages/Creatas/Getty Images