What is Required for a Corporation to Be Considered Non-Profit?

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Many entrepreneurs and business people are understandably confused about what is required for a corporation to be considered non-profit. A nonprofit corporation, or 501(c)(3), is a charitable organization that is recognized by the IRS. Non-profits do not pay income tax on its earnings or donations. Whenever people donate to a non-profit, they can reduce their taxable income through itemized deductions.

Why Form a Non-profit?

The primary reason people form a non-profit is to pursue a charitable goal or mission. Non-profits are one of the essential sources of support for social harmony and economic stability. A non-profit organization doesn’t have to be recognized by the IRS to pursue charitable work. However, the public will be motivated to donate if they can benefit from tax deductions. Obtaining the IRS-approved 501(c)(3) status means that the public will view the organization as legitimate. The IRS requires that non-profits report most of their financial and operating information, so this becomes public record available for scrutiny and accountability purposes. Filing for 501(c)(3) is important because the incorporation process protects the owners personal assets.

501(c)(3) Regulations

The IRS states that organizations that wish to operate as non-profits must exclusively pursue certain activities. These include organizations focused entirely on religious, scientific, charitable, educational and public safety work. They also include organizations that promote amateur sports competition and prevent cruelty to children or animals. The non-profit must provide a public benefit and it must be financially designed to not profit any one individual. No earnings from non-profits may be used to harm or interfere with any citizen. Non-profits cannot be so called action organizations that attempt to influence legislation and participate in political activities. The IRS expects impeccable financial records to be kept, which will help the organization pass audits.

How to Form a Non-Profit

Creating a non-profit corporation is similar to forming a regular corporation. However, non-profits must follow additional steps to apply for tax-exempt status with the IRS and their state’s tax department. First, they must choose an available and appropriate business name that meets their state’s legal requirements. Next, they must file the articles of incorporation, pay a filing fee and apply for federal and state tax exemptions. Then, they will establish their corporate bylaws, which will spell out the operating rules, and appoint the organization’s directors. Certain states require non-profits to choose the directors before filing the articles of incorporation.

How to Run a Non-Profit

Like other corporations, the non-profit group must obtain relevant city, county and state licenses and permits. Non-profits must hold meetings, keep minutes and file information returns. After non-profits are approved, there’s still work to be done to maintain non-profit status. The non-profit must operate in the way specified in the incorporation application. They must report on the organization’s activities, revenue, expenses, governance and net assets. Diverse funding sources are required because public organizations with limited funding sources may arouse suspicion. The IRS may force them to reorganize as a private foundations that operate by a completely different set of legal rules.

Related Resource: How Long Does A Business Take To Become Profitable?

What is required for a corporation to be considered non-profit status include designated missions, proper record keeping and appropriate activities. Be aware that non-profits that engage in excessive benefit transactions with a person who has substantial influence within the organization will likely be forced to pay excise taxes.

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