While many entrepreneurs focus on making money, others build a business around a cause. When a cause is so important to you that you want to make it your day job, it’s time to start a nonprofit.
What Exactly is a Nonprofit?
A nonprofit is created for charitable, educational, or other purposes – basically anything that doesn’t benefit the owners directly. The huge perk for nonprofits is that they are able to operate tax-free.
Nonprofit businesses can make profits (referred to as ‘surpluses’) but all money above operating costs must be used to further the goals of the nonprofit, like investing in equipment or resources to help it grow. Nonprofits can accept donations and grants.
Understanding the Nonprofit Business Structure
The most common nonprofit business type is the 501(c)3. Once a business is classified as a 501(c)3, it is eligible to become a nonprofit corporation. A nonprofit corporation has the same initial paperwork that a corporation has, with one difference. Nonprofits have a mission statement that clearly defines the organization. The purpose of the nonprofit must be laid out clearly in this mission statement.
Legal Protection for the Nonprofit Corporation
Just like with a corporation or LLC, nonprofit corporations have a corporate shield. If your nonprofit is ever sued, as long as your legal structure is compliant with state and federal requirements, you and other stakeholders will be immune from individual liability, and your assets can’t be touched.
The biggest legal issues for nonprofits involve losing that tax-exempt status due to misuse of the nonprofit, either through inappropriate gain or improper distribution of surpluses. Should you be found guilty of either of these violations, your nonprofit will lose its 501(c)3 status, and you will be treated as a for-profit business.
How to Start a Nonprofit
Starting a nonprofit is similar to starting any kind of business in some ways. You should conduct a name search and register the nonprofit paperwork with your Secretary of State and the IRS.
Once those tasks are complete, you’ll need to decide where to incorporate as a nonprofit, choose your directors, and create articles of incorporation. You will also need to secure any nonprofit business license required by your city, county, or state.
What You Need to Know About Nonprofit Taxes
Even though a nonprofit doesn’t have to pay taxes, you still have to file your taxes annually with the IRS. Because losing your nonprofit status has so many tax consequences, it’s important to keep financial records current and accurate.
Tax-exempt status is not automatic and can be denied. Application for tax-exempt status has to be made with both Federal and State authorities.
For your annual taxes, you will need to file Form 990.
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