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Business Entities: Nonprofit Corporations 101

Our business entities series has explored what it is like to form a limited liability company (LLC) and form a partnership. We’re shifting gears to discuss another popular entity formation: a nonprofit corporation. In this post, we will explore the following topics that pertain to nonprofits.

  1. What Is a Nonprofit Corporation?
    1. What’s the Difference Between Nonprofit and For-Profit Organizations?
  2. How to Start a Nonprofit Corporation Step by Step
  3. Considerations After Launching a Nonprofit

What is a Nonprofit Corporation?

A nonprofit corporation is a variation of a traditional C Corporation. It is a business formed to provide public benefit. The purpose of a nonprofit corporation may be to further a particular social cause or advocate for a specific point of view. Some examples include conducting charitable work, aiding in disease prevention, advancing environmental goals, or addressing social issues.

Tip: If you’re using Rollovers for Business Start-ups (ROBS aka 401(k) Business Financing) for funding or growth capital, you’re required to form as a C-Corporation.

Generally, most business owners will choose to organize as a nonprofit corporation if their mission serves educational, scientific, religious, or charitable needs. Forming a nonprofit corporation allows the organization to receive liability protection, which is key for its officers and directors.

What’s the Difference Between Nonprofit and For-Profit Organizations?

Nonprofit corporations are corporations founded for a charitable purpose. As such, it’s important for the owner to be comfortable with knowing that the nonprofit may not earn a major profit — or that the owner may not earn much money either.

Essentially, the greatest difference between a nonprofit and a for profit organization is that a for profit organization is a traditional business. It earns revenue that goes back to the business owners.

Nonprofits are committed to a social mission. Their primary goal is not to make a profit. A nonprofit corporation will reinvest its revenue to achieve its objective instead of distributing that income to its shareholders. Let’s detail a bit more about what this means for forming a nonprofit corporation, including creating a mission statement and filing for tax exempt status.

How to Start a Nonprofit Corporation: Step by Step

Starting a nonprofit corporation is quite similar to starting a standard corporation or LLC. There are a few differences, which we will detail below in this step-by-step guide.

1. Establish Your Mission

Once you know you want to form a nonprofit corporation, you must be able to determine its charitable mission and purpose.

As mentioned above, your nonprofit corporation will need to be organized for an exempt purpose. This is critical to remain in compliance with IRS regulations. You can establish your mission by drafting a mission statement. This statement can help answer questions regarding the goals you want to accomplish, whom you plan to help, and the vision of your nonprofit organization. Your mission will be taken into consideration by the IRS and state tax agencies when deciding if your business will achieve a nonprofit status. Make sure the mission statement you come up with is thoughtful and one where the nonprofit may be able to fulfill its purpose.

2. File for Tax Exempt Status

Filing for nonprofit tax-exempt status is done with the state and federal governments. The most popular type of exemption is 501(c)(3) status. This status exempts eligible corporations from having to pay federal and state taxes because the corporation is pursuing a nonprofit mission.

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In order to file for tax exempt status, nonprofit corporations must complete and file Form 1023 and pay a filing fee. Smaller nonprofit organizations may be eligible to apply using Form 1023-EZ. Once the agency has received the application, they will review to determine whether to grant the nonprofit corporation tax exempt status.

In addition, your nonprofit’s state of incorporation may require charitable solicitations registration. This is often required before soliciting donations and may be administrated through the Attorney General. Check in with your local Secretary of State to be certain.

3. Choose a Business Name

Pick a name for your nonprofit corporation that is unique, original, and meaningful.

Conduct a name search prior to filing for trademark registration. If the name is available and is not pending registration or registered elsewhere, you may file for a trademark at the federal level.

4. Designate a Registered Agent

A registered agent acts as the point of contact between your nonprofit corporation and the state. This individual, or third-party organization, is responsible for receiving legal and official business documents and delivering them to the owner in a timely manner. Remember that a registered agent must be a resident in that state. They must have a physical address — a P.O. Box does not count — and be available between general business hours Monday through Friday.

5. Incorporate the Nonprofit Corporation

Register your business by preparing and filing articles of incorporations with the state where your business will operate. Remember to fill out this document completely and pay the filing fee to the appropriate point of contact.

6. Create Corporate Bylaws

Corporate bylaws allow an organization to maintain consistency in its operations. Bylaws are a detailed set of rules agreed upon and adopted by the board of directors after forming a nonprofit corporation. You’ll find details about how directors are elected, meetings are organized, annual meetings, and the duties of each member of management inside corporate bylaws.

7. Obtain an EIN

An EIN is an employer identification number. This is a tax ID issued by the IRS that identifies your business for tax purposes. You may also use an EIN to hire employees and open a business bank account.

8. Draft a Business Plan

This may be written in a traditional or lean format for your nonprofit corporation. A business plan acts as the foundation for the nonprofit, covering its goals and timelines for reaching each one.

9. Build a Board of Directors

This is a legal requirement for nonprofit corporations. The names, and roles, of your board members must also be required on your nonprofit’s articles of incorporation. You may decide between having a working board, where the board members do the work in the organization in lieu of a paid staff. You may also appoint a governing board to oversee operations while a paid staff performs daily duties.

Considerations After Launching a Nonprofit Corporation

Once your nonprofit corporation is incorporated, you’ll still need to take care of additional odds and ends for the organization. Some of these include the following:

  • Setting up a website and social media presence.
  • Determining if you will have a physical office location.
  • Establishing a fundraising plan and getting familiar with fundraising platforms.
  • Networking with other nonprofit organizations, sponsors, and donors.

Additionally, remember that it is critical that your nonprofit corporation is able to remain in good standing. Keep corporate and financial records updated, along with minutes from meetings and corporate bylaws. The IRS will require your nonprofit corporation to file Form 990 on an annual basis. Pay taxes, update applicable licenses, and secure all data from donors and sponsors. It’s also a good idea to keep proof that you are pursuing the nonprofit corporation’s mission handy, too.

Maintaining good standing will ensure your nonprofit corporation is in compliance and abiding by the proper laws to be in business. If you need an extra hand starting a nonprofit corporation, reach out to our team at MyCorporation for assistance!

Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Twitter @deborahsweeney and @mycorporation.

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