What is a nonprofit corporation?
A nonprofit corporation is a special type of corporation created specifically to provide additional benefits for businesses who intend to operate with a charitable purpose. While a nonprofit shares all of the standard benefits that come along with incorporation, it also allows a business to apply to the IRS for tax exemption status. In order to qualify for this exemption, a business must be formed to benefit the public or a specific group of individuals. Some examples of nonprofit corporations include Goodwill, YMCA, and the American Red Cross.
What are the benefits of filing as a nonprofit corporation?
Nonprofit corporations are eligible to apply for a 501(c)(3) status, which is a designation issued by the IRS to businesses that are established for a religious purpose, charities, educational or scientific reasons, as well as businesses centered in public safety and testing. Organizations that are designated as a 501(c)(3) are exempt from federal, sales and property taxes. Over time this savings can be substantial, allowing nonprofit corporations to reinvest its profits back into the organization, and give the business the chance to further service the community.
In addition, many public and private institutions that fund grants only accept applications from public charities or nonprofit businesses, so a business that relies on these kinds of grants would benefit from choosing to form a non profit organization. Nonprofits can also receive contributions that are tax deductible for the individual who contributes, which can provide additional incentives for public donations.
What kinds of businesses should form a nonprofit?
In order to enjoy the benefits of federal tax-exempt status, nonprofit businesses and organizations must meet a few basic requirements. First, they must be formally incorporated, have chosen a name for their business, and filed their articles of incorporation (a requirement in most states) to qualify for exemption from state and local taxes.
They must also establish a mission statement. This is done not just to define their mission and values, but is also necessary for the IRS and state tax agencies to take into consideration when deciding if your business will achieve nonprofit status. The nonprofit must follow state and federal accountability rules and meet reporting requirements to remain eligible. Under the Federal Tax Code Section 501(c), a tax-exempt corporation cannot pay dividends and, upon dissolution, must distribute its remaining assets to another nonprofit group.
How does a nonprofit become tax exempt?
Simply forming a nonprofit online does not grant tax exemption. Nonprofits must file for tax-exempt status with the IRS. Upon being reviewed, the agency will decide whether or not to grant tax-exempt status.
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