Nonprofit Basics

Grants, tax advantages, and limited liability protection are available to nonprofit businesses.

Nonprofit (or not-for-profit) companies are beneficial to a wide range of organizations, from arts and music organizations to those involved in education, health, conservation, and community services. The rationale for getting nonprofit status is typically straightforward: it's a criterion for receiving money from government agencies and private foundations. Tax-exempt status and personal responsibility protection are two other significant advantages

Here's a rundown of the many sorts of organizations that should consider forming and what they may expect in the future.

Tax-Exempt Status

Many nonprofit organizations apply for nonprofit corporation status in order to be free from federal and state income taxes. Section 501(c)(3) of the Internal Revenue Code provides the most popular federal tax exemption for charities, which is why they are commonly referred to as "501(c)(3)s."

If your nonprofit receives tax-exempt status, it will not only be exempt from paying taxes on all revenue generated by activities relevant to its charitable mission, but individuals and organizations who give to the nonprofit will also be able to deduct their donations.

Protection From Personal Liability

The directors, executives, and members of a nonprofit company are usually shielded from personal accountability for the business's debts and other responsibilities. This barrier, known as limited liability, guarantees that anybody who secures a judgment against a nonprofit may only reach the corporation's assets, not the bank accounts, homes, or other property owned by the persons who administer, work for, or participate in the organization.

Who Should Consider Becoming a Nonprofit

Nonprofit organizations come in a broad variety of shapes and sizes. A partial list of organizations that may be eligible is as follows:

• childcare centers
  
• shelters for the homeless
  
• community health care clinics and hospitals
  
• museums
  
• churches, synagogues, mosques, and other places of worship
  
• schools
  
• performing arts groups, and
  
• conservation groups.
  

If your organization isn't on this list, it doesn't imply you won't be eligible for tax exemption. You should be eligible to receive a tax exemption if your group's activity is charitable, educational, literary, religious, or scientific, and you fulfill the other conditions for tax-exempt status.

Forming a Nonprofit Corporation

It's fairly similar to creating a conventional corporation to start a nonprofit corporation: Your state government's corporations division (typically part of the secretary of state's office) will need you to file articles of incorporation. You must, however, file federal and state tax exemption petitions, unlike normal businesses.

Following the filing of the first papers, you will draft corporation bylaws, which will outline your nonprofit's operational procedures. Finally, you elect your nonprofit's first board of directors and host an organizational board meeting. (See How to Form a 501(c)(3) Nonprofit Organization for additional information on how to form a nonprofit corporation.)

Who Plays Which Roles in Running a Nonprofit Corporation

The majority of nonprofit businesses are governed by a board of directors, which in certain jurisdictions is referred to as trustees. The major responsibility of the board of directors is to create policy for the organization and to oversee areas such as finance, strategic planning, and management-level recruiting.

Officers of a nonprofit company are generally appointed by the board of directors. Depending on their needs and any state law requirements, most nonprofit companies have a president, secretary, and treasurer, and some have additional roles such as vice-president or assistant secretary.

Officers can be members of the board of directors or non-board members who are involved in the day-to-day operations of the organization. For example, the individual named president might work as the nonprofit's executive director on a paid staff job and be in control of the organization's operations. Alternatively, the president might be the board's chair, with the president's principal responsibility being to lead board meetings and manage board affairs. The treasurer and secretary, as well as any other official post, are in the same boat. Non-board members who are paid personnel and actively operate the business can fill these positions, as can persons in advisory roles on the board. The articles of incorporation and bylaws of a nonprofit generally dictate how this is handled. In addition, some states have laws governing officer positions, such as what jobs are necessary, whether one person may serve in several roles, and whether paid officers can serve on the board.

When a nonprofit reaches a certain size, the board of directors usually approves the hire of a complete complement of paid employees, including program staff, administrative assistants, and development staff.

Following the Rules on Corporate Behavior

The majority of the same procedures apply to nonprofit businesses as they do to for-profit corporations. Retain solid corporate records, hold and prepare minutes of directors' (and perhaps members') meetings, and keep a separate bank account, among other things.

Except under extremely restricted situations, a nonprofit company cannot transfer any earnings to its members, donate money to political campaigns, or engage in lobbying activities.

Ending a Nonprofit Corporation

Because nonprofits aren't truly owned by anyone, they can't be sold. If the directors of a nonprofit corporation elect to dissolve it, they must pay off all of the nonprofit's debts and obligations and donate all of the organization's assets to another tax-exempt nonprofit.

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