Top Advantages and Disadvantages of Nonprofit Corporation
If you’re forming a charitable organization, will you be able to help more people more effectively by officially forming a nonprofit corporation? Check out the pros and cons of a nonprofit corporation to help you decide.
It’s a noble goal to want to help people in your community, whether that “community” is your local neighborhood, the people in your country, or even people all over the world. The question if makes it easier for your charitable group to achieve your goals if you formally turn this group into a nonprofit organization.
In many situations, becoming a nonprofit corporation can help your cause a great deal. But the advantages you gain may come with certain disadvantages as well. You will have to decide whether the potential drawbacks of becoming a nonprofit corporation are worth the benefits you get with this move.
To help with your decision, here’s a clearer picture of the advantages and disadvantages of turning your charitable group into a formal nonprofit corporation.
Advantages of Forming an NPC
Here are the most common reasons why becoming a nonprofit corporation is a great way to make your cause a lot more effective.
One of the most obvious ways your group can acquire more resources to help others is by receiving donations. These can be from the public, or even from other business entities.
People are more inclined to give you their money because they consider your group as trustworthy. After all, there are standards you need to meet when you become a nonprofit corporation. You can’t just say your group is about helping people and not about making money. You have to prove it, too, at least to the government.
When you’re officially an NPC, then you’ve proven that your group isn’t in it for the money. With the regulations and oversight with which your group has to work, your donors feel safe that their money will actually be put to use in a way they think is right. They’re reasonably sure you won’t use their money for selfish reasons.
Aside from your enhanced trustworthiness, donors may also have a more practical reason to give you their money. This is because there may be good tax reasons for them to donate to your cause. They may enjoy a deduction in the amount of their income on which they have to pay taxes. They may also enjoy a tax credit, meaning their donation to your NPC reduces their tax liabilities by the same amount.
Potential Tax Exemption
Being exempted from paying taxes to the federal and state governments is one of the most crucial advantages of incorporating your group into a nonprofit corporation. To qualify, your group has to comply with stringent oversight standards and regulations. You will need to explicitly state your goals in your incorporation documents to meet the requirements for tax exemption.
Just because you say you’re a nonprofit group aiming to help the community won’t be enough. That doesn’t automatically grant your group its tax-exempt status. You’d have to apply to the IRS first so you won’t have to pay federal taxes. Then you have to go through a similar process with the state government so you won’t have to pay state taxes either.
It is technically possible that your group can remain unincorporated, and still get its tax-exempt status. But it’s a lot easier if you’re able to set up your group as a legitimate NPC.
You’re Eligible for Grants
In fact, your group can only receive grants when you already have the 501(c)(3) tax exemption. Without it, you can’t get these grants at all.
Grants are funds that are given by the grant-makers to a recipient such as an NPC. These groups that offer grants can include a foundation or trust. A corporation can give grants to charitable organizations. Even a government department can offer grants as well.
A grant is much better than a loan, because your group isn’t expected to pay back the money. These grants can reach huge levels of money, and in general the only condition is that you use up the money wisely. That is, you should spend it on directly achieving your NPC’s goals, rather than on “boosting morale” by using the money for the leaders of the group to enjoy a month-long vacation at a tropical paradise.
When you have a nonprofit corporation, one of the requirements is that you set up a leadership structure involving a key group of individuals. In general, that usually means having a board of directors to oversee the big picture, while you also have officers managing the day-to-day decisions.
A structure like this formalizes the decision-making process, and avoids the time-wasting distractions such as arguments as to who makes the call. Teamwork is a more effective means of achieving your goals, if everyone can work together.
It encourages transparency, since no single individual can make secret decisions for the whole group. It also encourages accountability as well.
Finally, it fosters a greater sense of permanence. That means that the NPC can live on and continue in its efforts, even when the original group members move on and leave. The sense of ownership can pass on to new board directors and officers who can continue the charitable efforts.
Keep in mind that the American Red Cross was founded way back in 1881, and it’s still among the most renowned nonprofit organizations in the whole world. This is only possible with the leadership structure required for the group to be incorporated.
More informal organizations are less likely to endure because there are no set rules in place to pass on the responsibilities to other people. In these associations, the entire group can just implode once the original members lose interest or retire.
Benefits for NPC Employees
Nonprofit associations that aren’t incorporated aren’t able to offer benefits to their employees. That means they’re unable to offer pensions, health insurance, and other similar benefits that businesses for-profits can provide for their employees.
Without these benefits, your group may not be able to attract the best and the brightest among the pool of potential employees who can help your group succeed in its goals.
It’s true that many nonprofit groups can also attract employees who aren’t simply there for themselves. They may want to help, more than they want to earn the big bucks. But benefits such as health insurance and pensions are practical considerations that very few employees can realistically overlook.
Besides, these benefits are also morale boosters, which help to motivate your people to work harder. Often, your workers try harder when they know their efforts are appreciated. These benefits are concrete signs of your group’s appreciation.
Disadvantages of Forming an NPC
It’s true that some nonprofit associations don’t bother with incorporating. Often, this is either because their group is too small or they know that the purpose of the group is only temporary.
If you’re incorporating your nonprofit group, be ready for these potential issues:
It can be annoying when you want to help people in your community, and you’d first have to pay for the privilege. That’s why some people just find it easier to give their money to an NPC that’s already in place.
If you’re applying for tax exemption, you have to pay the fees first. That can be a minimum of $250, which some small groups may not be able to afford. That would be especially true in some other cases when the tax exemption fees can reach almost a thousand dollars. For a small group, these fees can be truly substantial.
Keep in mind that your state will also require a fee for your group to incorporate. In most cases, these fees aren’t as huge as the fees for tax exemption, but it’s still an additional cost.
Iffy Tax Exemption
Just because you call your group a nonprofit association doesn’t mean your group will eventually get tax-exempt status. Country clubs and other membership clubs may not qualify, even if they succeed in incorporating as a nonprofit. These clubs can still end up paying taxes.
Long Wait for Tax Exemption
Even when you do get your tax exemption in the end, you still have to endure the interminable wait to finish the whole process. A lot of people get frustrated and just give up in the end.
This starts with the expensive IRS Form you need to complete to get your tax exemption. This form is tedious to fill up because it’s almost 30 pages long. That’s seriously bothersome, and frustrating as well.
With a form this lengthy, you’re also likely to make mistakes when filling it up. If your form isn’t totally filled up in the correct manner, you have to correct the mistakes and start all over again.
Even when you’ve completed the form without making a mistake (or if you’ve fixed all your mistakes), the IRS can still take considerable time to process your application. To be fair, it’s true that you’re probably not the only group applying for a tax exemption. The IRS may be processing lots of other applications.
Of course, the IRS is also a government institution. Government institutions aren’t exactly famous for their smooth efficiency.
Greater Ethical Standards
You will have to be extremely transparent with your activities and finances since as an NPC you will face greater levels of public scrutiny. You must let the public access your annual reports. If anyone asks for your business records, you’re required to provide those records.
It’s not only your donors who may end up criticizing the decisions made by your group. Even the general public, and people who don’t donate a penny to your cause, may have issues with what you do with the donations and grants your group receives.
While regular businesses may receive a lot of flak for their missteps, you’ll get more criticism. In fact, in some cases, you will be criticized for decisions that would be perfectly acceptable to a standard corporation.
Lots of Paperwork
Running an incorporated group entails a lot—really, a lot—of paperwork. If that 30-page application form already fills you with dread, then you will be aghast at the mountain of paperwork you’ll have to deal with once you gain your tax-exempt NPC status.
NPC is required to maintain detailed records. These include taking care of your tax-exempt certificate status letter and your charitable registration permits. You have to keep copies of your NPC bylaws.
You also need to maintain your financial records, since you can’t keep your finances secret as a nonprofit organization. You will have to file yearly reports to your state. If you have tax-exempt status, you still need to file an income report to the IRS even if the income isn’t taxed.
If you forget to fulfill your paperwork responsibilities, you may well end up losing your tax-exempt status. That can be a huge blow to the credibility of your group.
Tedious Grant Application
While it’s true that only an NPC can receive grants, it’s also true that getting these grants won’t be easy. It can take a very long time, and often you won’t get the grant you’ve applied for. It can be terribly frustrating.
It’s true that even standard businesses that aim to make a profit help consumers and communities in their own ways. There’s nothing wrong with being paid for these efforts.
A hospital, for example, can help thousands of people a month, helping to maintain people’s health even while turning a healthy profit.
But there’s also no denying the sheer effectiveness of a group such as the American Red Cross. Their renowned nonprofit status has led to total revenue of $3.6 billion in 2019. The public donated almost $1.6 billion to their cause, while the government also chipped in close to $49 million.
Consider carefully whether becoming a nonprofit corporation can help you help others. The right decision makes it easier for you to achieve your goals, and more people benefit from your efforts as well. Being able to help more people more effective is its own kind of profit.