Why Form a Nonprofit?
Do you want to start a business in order to help your community at large and benefit society in some way? If these are your goals, it is wise to consider a nonprofit business entity. Before starting a nonprofit, it is important that you have the right frame of mind to operate one. A nonprofit requires a lot of time, energy, vision, and talent, and a strong desire to reach the nonprofit’s goals.
Forming your company as a nonprofit corporation has a number of benefits if your end goal is to benefit a group or the public at large:
: Many nonprofits are able to apply for 501c3 tax-exempt status, which exempts them from federal corporate tax. Once 501c status is obtained, then generally there are also state tax exemptions, such as state income tax and franchise tax, which nonprofit corporations may be exempt from paying as well.
: Nonprofits can solicit funds from the public in order to support their causes. If a nonprofit is considered a charity/has a charitable purpose, then often those who donate can make their contributions tax-free. There are also many government grants and private grants available for nonprofit organizations to take advantage of.
: Because a corporation is a business structure where the business is separate from the individuals and because of the indemnification clause in the articles of incorporation, personal liability is taken away from the individuals, protecting their personal assets. The liability falls onto the shoulders of the nonprofit itself in case of service of process or debts the organization might incur.
Things to consider:
Make sure to think about the costs of starting your nonprofit: it generally costs more to form a nonprofit corporation as opposed to a for-profit corporation because there are additional fees for charity registration as well as annual charity renewal fees among other costs, depending on which state you incorporate in. How will you initially fund it and account for these startup costs? The application process for obtaining 501c3 tax exempt status is lengthy and may require the assistance of a lawyer or accountant. The creation of the bylaws might require hired legal assistance as well.
Because a nonprofit does not have shareholders, dividends cannot benefit individuals. What this means is at the end of the fiscal year, if there is any money left over, it must go back into the nonprofit. Expenses must be paid, salaries must be covered for employees, and any remaining money must benefit the cause of the nonprofit.
The Pros and Cons of a Nonprofit
-Able to fundraise for income.
-Eligible for tax exemption.
-Personal liability protection.
-More likely to receive grant money than a for-profit corporation.
-Able to fully support a cause via your legal business entity.
-Additional charitable registration paperwork is required.
-Obtaining tax-exempt status is a lengthy, complicated process.
-No individual benefit allowed via dividends.
-More paperwork and fees.
-Costs more to form than a for-profit corporation.