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Nonprofit Corporation: Is it a viable option?

Nonprofit corporation overview

Have you ever thought of organizing your company as a nonprofit corporation? Unlike for-profit companies, nonprofit corporations are sometimes eligible for certain benefits such as property and income tax exemptions. While most federal tax-exempt organizations are nonprofit corporations, organizing as a nonprofit at the state-level does not automatically allow you exemption from federal income tax.

Nonprofit corporations and for-profit corporations also treat profits from the business in a very different way. With a for-profit business, the owners and shareholders generally share in the profits of the business. With a nonprofit corporation, money left over after paying expenses is generally put back into the business. Also, many nonprofit corporations are allowed to receive contributions that may be tax deductible to the contributor. The general idea of tax exempt, nonprofit corporations is to benefit the public as opposed to the business.

Nonprofits are incorporated under the laws of the state in which they are established. In order to receive tax-exempt status you must apply with the IRS. First you must request an Employee Identification Number (EIN) and then apply for recognition of exemption by filing Form 1023 (Charitable Organizations) or 1024 (Other Tax-Exempt Organizations), along with the necessary filing fee.

The different types of nonprofit corporations are identified by the IRS by the tax code by which they qualify for tax-exempt status. One of the more common forms is 501 ( C ) (3), which usually set out to do charitable, educational, scientific, religious and literary work. Many different types of organizations fall within this category including educational centers, outpatient clinics and hospitals.

There are certain activities nonprofit corporations are not allowed to participate in according to the IRS, if they want to maintain their tax-exempt status. One example may be a section 501 ( C ) (3) organization which cannot intervene in political campaigns.

Nonprofit corporations still have to pay employment taxes, but may be exempt in certain states from paying sales taxes. You would have to determine specific exemptions by checking with your respective state in relation to their tax-exempt regulations. Some nonprofit corporations end up paying an unrelated business income tax (UBIT). This type of tax is usually applied to business operations that are not significantly related to the charitable purpose of the business. A tax-exempt organization with $1,000 or more gross income from an unrelated business must file form 990-T and pay tax on the income.

Nonprofit corporations with revenues of more than $25,000 per year must file an annual report (Form 990) with the IRS. Form 990-EZ is a shortened version of 990, and has been designed for smaller organizations with total assets at the end of the year of less than $25,000.

Also, form 990 requests information on the organization’s income, expenses and staff salaries that exceed $50,000. Also, you may have to comply with similar state requirements. These IRS reports must be made available for public review.

Even after you decide on a business structure, circumstances may change which may make it a more favorable option to establish a different form of business at a later point in time. While a nonprofit corporation may be a viable option at the beginning, you may want to reassess your form of business from time to time to make sure that you’re using the type of business structure that continues to provide the most benefits.

Information from Start Your Own Business by Rieva Lesonsky

Web page and Starting Your Own Business Course by Paul Susic MA Licensed Psychologist Ph.D. Candidate CEO/President Susic Psychological Consulting P.C.