Ever heard of a company that does business without gaining profits? It may sound absurd, but some institutions, organizations, or even corporations care to do that. These corporations are also among the most active when it comes to communitarian activities, supporting social sectors, and other charitable acts that are deemed unnatural to doing business.
All these are what define a nonprofit corporation, and it’s part of the economic and social growth of any community or nation.
What is a Nonprofit Corporation?
Investopedia defines a nonprofit or not-for-profit corporation as a business corporation that provides goods or services without the aim to gain profits. They are technically operated through various business ventures and/or donations to run their usual operations, though they aren’t aimed toward creating commercial gains for their members.
The majority of nonprofit corporations are charitable organizations or public service institutions.
Forming a Nonprofit Corporation
While it’s easy to gather up several like-minded individuals to form a corporation that envisions serving society without profiting from it, forming a nonprofit has a lot of requirements.
While most of these requirements are similar to that of regular for-profit businesses and organizations, a nonprofit has special permits required to operate, including arrangements in taxations, city and state regulations, and other special prerequisites deeming them as not for profit.
To begin, the articles of incorporation are necessary to create a nonprofit corporation. They’re similar to that of profit corporations, with only a slight deviation on taxation based on the regulations for nonprofits mandated by the governing internal revenue department, like the US’s Internal Revenue Services or IRS.
Also, a registered agent must be appointed to oversee the processing of the Employer Identification Number (EIN) in the event the nonprofit employs individuals for operational support and labor. They’re the primary shareholder who oversees the processing of a business bank account, establishment of financial flow managers, and other state-mandated requirements to commence a business.
Also, nonprofit corporations require directors. However, this regulation varies from state to state. Transparency is also a necessity as most income received by nonprofit corporations comes from public or private awards and donations.
The public will always take interest in the performance of nonprofit corporations and ensure that they’re operating without any business flaws that would make them liable for graft or corruption.
If you’re planning to start a nonprofit corporation, it will be in your best interest to separate personal finances from business finances to avoid flaws and discrepancies for a not-for-profit business. The best thing to remember about forming a nonprofit corporation is that no one receives any dividend from your business, as it is nonprofit.
However, to ensure member protection, credibility, and sustainability, bylaws and customs have to be put in place before commencing the corporation.
Forming a nonprofit corporation doesn’t have to start from scratch too. You may start as a small charitable organization before incorporating it into a nonprofit company. It has a lot of advantages and disadvantages that will truly shape your members and the organization into an entity that is worth looking up to by the business sectors and the community.
Taxation as a Nonprofit
Taxation as a nonprofit has special tax jurisdictions than its counterpart.
A nonprofit corporation needs to comply with exemption requirements for them to take advantage of income tax leverages or exemptions honored to companies deemed as charitable or directed to public service.
To be tax-exempt means that all income-generating activities done by a business are free of state, federal, or local taxes. Section 501(c)(3) of the Internal Revenue Code provides details of how an organization can gain tax-exempt status and gain inurement honored to public services and charitable organizations.
In the United States, the Internal Revenue Service provides specific guidelines that will recognize nonprofit corporations, charitable organizations, or corporations without private interests. If you want to know how to gain Section 501(c)(3) status, you can check the application process on the IRS website.
On another note, not all nonprofit corporations are eligible for tax exemptions. This eligibility is mandated by the state and federal government. In other words, the government still has the last say over which nonprofit corporations or institutions gain tax leverages or exemptions.
This regulation also ensures that none would use the tax leverage as an escape from fraud and scam cases.
Nonetheless, as a business, they still need to comply with other regulatory taxations mandated by the state or country they’re established into. Tax profiles like federal business taxes, sales and property taxes, and any other state regulatory taxes aren’t given an exemption for those running a nonprofit corporation.
The best way to know more about taxations for nonprofits is to visit your state’s Department of Revenue or other state agency that governs state revenues.
Should I Bother Incorporating?
While it isn’t necessary to incorporate, turning your charitable organization into a nonprofit corporation has its advantages.
For one, incorporating provides opportunities for growth through public and private funding such as grants and sponsorships. Grant eligibility is based on the type of organization, corporation, or institution you operate and maintain.
Also, donations are deemed tax-exempt, so other companies will find your corporation an opportunity for promotion while gaining trust and reputation from economic drivers (i.e. other businesses) and keeping your day-to-day operations working.
Just a piece of advice, though. You may want to check with your state regarding the regulations concerning solicitations from the public to avoid any legal infringements before proceeding to accept grants, donations, or sponsorships to your nonprofit corporation.
Incorporating your nonprofit organization also gives you limited personal liabilities. As long as you legally declare your business assets as a nonprofit, you won’t get cut off on your assets when unforeseen business failures or legal discrepancies happen with your corporation.
However, this move isn’t an easy or affordable thing to do. So, it’s best to take considerations before incorporating your organization than simply looking at it as an escape from unwanted personal liabilities if anything gets messy.
If you are also looking towards improving your professional image, then incorporating is an excellent opportunity. The state controls the incorporation of entities, which gives the public much greater confidence that the corporation or organization they’re supporting is compliant with government laws and has established a reputation as a nonprofit.
Again, incorporating your business as a nonprofit isn’t easy or cheap. It takes a lot of effort, especially with handling processes to gain tax-exempt status, to build your organization, and incorporate it as a nonprofit corporation.
If you need help deciding or getting through the process, an incorporation service expert can get things off the plate. You may check with your state revenue department or local incorporation service providers to get you started or provide a walkthrough on incorporating your nonprofit organization or charitable institution.
Nonprofit corporations aren’t good business ventures to gain personal profits, but they’re essential and collaborative in shaping the community and supporting people. Running a nonprofit corporation exemplifies the causes you believe in and promotes goodness to everyone, even encouraging them to take part in supporting causes and helping those who need assistance or support.
It also brings like-minded people to form an entity that can support, give hope, and provide social awareness to everyone in society.