Answers and Information
Nonprofit, also called not-for-profit, corporations work well with a range of groups, from artists and musicians to people active in education, health, and community services. The reason for doing this is simple; nonprofit status is usually a requirement for obtaining funds from government agencies and private foundations. Grants, however, are not the only reason to incorporate. There are two additional important benefits of forming a nonprofit: 1) tax-exempt status and 2) personal liability protection.
Relating to the first benefit: The most common federal tax exemption for nonprofits comes from Section 501(c)(3) of the Internal Revenue Code, which is why nonprofits are sometimes called 501(c)(3) corporations. If your group obtains tax-exempt status, not only is it free from paying taxes on all income from activities related to its nonprofit purpose, but people and organizations that donate to the nonprofit can take a tax deduction for their contributions.
Relating to the second benefit: Forming a nonprofit corporation normally protects the directors, officers, and members of the nonprofit from personal liability for the corporation's debts and other obligations. Referred to as "limited liability," this shield ensures that anyone who obtains a judgment against the nonprofit can reach only the assets of the corporation, not the bank accounts, houses, or other property owned by the individuals who manage, work for, or participate in the business.
There are, however, as with corporations and LLC’s, exceptions to the limited liability. Limited liability can be compromised and a non-profit held responsible for the debts of a director or officer:
- personally and directly injures someone
- personally guarantees a bank loan or a business debt on which the corporation defaults
- fails to deposit taxes or file any necessary tax returns
- does something intentionally fraudulent, illegal, or clearly wrong-headed that causes harm, or
- co-mingles nonprofit and personal funds.
To cover some of these exceptions, reasonably priced insurance is available to protect volunteer directors, who may be reluctant to serve without it.
The types of groups that typically seek nonprofit status vary widely. Here's a partial list of associations that may be eligible:
- childcare centers
- homeless shelters
- community health care clinics and hospitals
- museums
- churches, synagogues, mosques, and other places of worship
- schools
- performing arts groups, and
- conservation groups.
Even if your group is not on this list, as long as your group's activity is charitable, educational, literary, religious, or scientific, you should be able to get a tax exemption.
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Corporate Structure Resource Center
Sole Proprietorships
A guide to Sole Proprietorships.
Partnerships
A guide to Partnerships.
Corporations
A guide to Corporations.
Limited Liability Companies - LLCs
A guide to Limited Liability Companies (LLCs).
Non Profits
A guide to Non-Profit Organizations.
