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Non-Profit Corporation
Business Formation

A nonprofit is created for charitable, educational or other purposes – these cannot benefit the owners directly. This allows nonprofits to operate tax-free.

Non-Profit Entities

Non-profits are named for the Internal Revenue Code section they fall under. 501(c) is the most common. This is further broken down into sub classes. For instance, a 501(c)(19) would refer to an organization of current or past members of the armed forces. The IRS recognizes 26 different sub-classes of nonprofits.

Non-profits operate tax-free. They can make profits (referred to as ‘surpluses’) but all money above operating costs must be used to further the goals of the nonprofit. Surplus cannot be paid to the stakeholders.

Non-profits can accept donations and grants. The tax benefits can flow through to donors who contribute money or time. Wages may be paid to employees at standard rates.

Under Section 501(c)(3) of the Internal Revenue Code, a nonprofit corporation may be exempt from taxation and may be eligible to receive tax-deductible donations from its contributors.

Restrictions and challenges:

  • Cannot pay dividends

  • Upon dissolution, corporate assets must generally be distributed to another qualified non-profit group

  • Complex filing requirements exist at both the State and Federal level to establish and maintain tax-exempt status

  • Prohibited from engaging in certain activities

Going beyond the scope of  non-profit's mission can mean loss of tax-exempt status.

Steps for Starting a Non-Profit​

  • Determine a mission that clearly defines the organization's purpose

  • Choose a business name

  • Select a board of directors

  • File Articles of Incorporation with the state

  • Obtain an Employee Identification Number (EIN)

  • Draft bylaws

  • APPLY for tax-exempt status with the Federal and State authorities

  • Hold the first board of directors meeting

  • Open a corporate bank account after exempt status is received

  • Obtain required business licenses and permits 

  • Submit an initial report to the state

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Compliance Requirements of a Corporation

  • Hold regular meetings of the Board of Directors

  • Record minutes of meetings 

  • Do not commingle the non-profit assets with other personal or business assets

  • Must comply with state and federal filing requirements

Market and Margin, PC does not provide legal advice.

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