Advantages of a Non-Profit Corporation
- Tax Exemptions - Section 501(c)(3) of the IRS code provides non-profit corporations with certain federal tax exemptions. Unless a non-profit corporation qualifies for and files a 501(c)(3) application with the IRS, it will not receive federal tax exemption. Each state also requires a tax exempt application, however, most states will accept the federal tax exempt filing in place of their own application.
- Receiving Public Funds - Many organizations are required by law to donate a percentage of their funds to non-profit organizations or they could possibly endanger their own tax-exempt status. In addition, there many exemptions for a non-profit organization that receives property transferred at death.
- Limited Liability for Members and Directors - As with a general, for-profit corporation, directors, trustees, and officers of non-profit corporations are usually afforded limited liability status. Thus, creditors of a non-profit corporation can only reach as far as the corporation's assets to satisfy corporate debts, and cannot bring a claim against the people involved in the non-profit corporation.
Exceptions to the Limited Liability Rule
- Personal Guarantees - Where a corporation has not yet established a credit rating, banks and other creditors will often require a personal guarantee from corporate directors before extending credit. Thus, the individuals will be liable for the debt if the corporation defaults on its obligation.
- Membership Dues - Members of a non-profit corporation are personally liable for any membership dues they owe to the corporation.
- Violation of Statutory Duties - Corporate officers and directors have a statutory duty to act responsibly when engaging in corporate activities. If an individual acts irresponsibly on behalf of the non-profit, he or she may be held personally liable for his or her actions.
- Separate and Perpetual Existence - A non-profit corporation, like a for-profit corporation, is an entity with a perpetual existence that may outlive all of its founders. Additionally, the corporation can act like an individual in that it can enter contracts, incur debt, and own property.
- Employee Benefits - The principles of a non-profit corporation can be employed by the corporation. As such, these employees can be eligible for fringe benefits not available to self-employed people. Examples of these benefits include, sick pay, group life insurance, accident and health insurance, and corporate pension plans.
Advantages of a Non-Profit Corporation
- Non-profit corporations under 501(c)(3) receive lower postal rates on bulk mail.
- Many organizations offer discounted advertising rates to non-profit entities.
- Many internet service providers offer discounted rates to non-profit corporations.
- Many national chains (Costco, for example) offer lower membership rates to non-profits.
- Non-profit corporate employees may qualify for job training and other work/study programs subsidized by the federal government.
IRS Form 1023
On the federal level, IRS form 1023 must be completed to qualify for 503(c)(3) federal tax exempt status. Although certain groups are not required to file form 1023, it is recommended that these exempt organizations submit the filing nonetheless in order to ensure that the IRS views the organization as a tax-exempt entity. Once a corporation’s 501(c)(3) filing is approved by the IRS, the non-profit can rest assured that its tax-exempt status cannot later be challenged.
IRS form 1023 must be filed within 15 months of the filing of the entity’s articles of incorporation. If filed in a timely manner, the tax exemption will be retroactive and will apply to the date of incorporation.
How Many Directors Must My Non-Profit Corporation Have
Most states require that a non-profit corporation maintain a minimum of 3 directors. The following states will allow less than three directors if there are less than three members:
- Louisiana, Massachusetts, Minnesota and Virginia
The following states require only one director for non-profits:
- California, Colorado, Delaware, Iowa, Kansas, Michigan, Mississippi, New Hampshire, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia, Washington and West Virginia
Organizational Purposes of Non-profits
Under IRS Code 501(c)(3) a non-profit corporation may be formed to operate for religious, charitable, educational, literary, or scientific purposes. These five purposes are usually included as purposes accepted by the individual states as a valid non-profit corporate purpose.
Limitations imposed upon Non-Profit Corporations
Some of the limitations imposed on Non-Profit Corporations are:
- Pursuit of the following corporate purposes only: charitable, educational, religious, literary, or scientific purposes.
- No distribution of financial gains to directors, officers or members.
- Corporate assets may only be distributed to another tax-exempt organization upon dissolution of the non-profit corporation.
- Participation in political campaigns for or against persons running for public office is prohibited.
- Substantial engagement in legislative political activities is forbidden.
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