When making the decision to register an organization as a nonprofit, entrepreneurs
must be sure to understand the legalities and tax implications behind the classification.
Incorporating a company as a nonprofit does not necessarily make it exempt from federal income tax, though most nonprofits are generally exempt from sales, property and income taxes at state levels.
In order to be exempt from income tax at the federal level, a nonprofit organization must apply with the IRS. All of the activities nonprofits obtain must be used in services for the public good.
"Nonprofit organizations can engage in virtually any business enterprise in the fulfillment of their mission objectives without jeopardizing their tax-exempt status," Inc. magazine reported. "When these organizations undertake activities that are unrelated to their stated missions, then the profits generated from those activities are taxable."
Such activities may include political campaigns, which are deemed an "unrelated activity" for a 501(c)(3) nonprofit.
Nonprofit organizations must treat the profit they turn over differently than a for-profit company does. While its counterparts can turn over profits to owners, nonprofit companies must funnel any funds left over after paying bills back into the organization.
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