The Advantages of Non-Profits

Non-profits must meet exempt purposes established by the IRS to receive 501(c)(3) status.

A non-profit is an organization that is formed to offer public benefits and fulfill a mission as opposed to earning a profit. To help non-profit efforts to benefit the public, the federal government has established rules that are advantageous to non-profit organizations. Non-profits must apply with their states and the federal government to receive benefits offered to non-profits. Non-profits must also follow state and federal rules about non-profit status to continue to receive benefits.

Corporate Structure

Many nonprofits choose to incorporate in their state. A corporate structure provides many benefits. One advantage of incorporating a nonprofit is the ability to apply for federal tax-exempt status. The IRS requires nonprofits to apply for incorporation before seeking tax-exempt status. Another advantage is that a corporate structure allows nonprofit organizations to protect their name within their state, which means no one else can legally use it. A corporation is required to have a director and officers. This business structure helps nonprofits adapt formal operating procedures. The cost of incorporating a nonprofit is typically less expensive than incorporating a for-profit business. For example, in Texas in 2011 it cost $25 to incorporate a nonprofit organization and $300 to incorporate a for-profit business.

Exempt from Federal Income Taxes

Charitable, religious and other eligible nonprofit organizations can receive federal tax-exempt status under section 501 of the Internal Revenue Code by completing Form 1023 and submitting it to the IRS. Most nonprofits are granted exemption from income taxes as a 501(c)(3) organization. The benefit of not having to pay federal income taxes is that nonprofits can use that money to further their operations. Many states grant state income tax and sales tax exemption to nonprofits with 501(c)(3) status. Although 501(c)(3) nonprofits do not have to pay federal income taxes, they are still required to submit an annual federal income tax return to the IRS.

Liability Protection

A nonprofit is essentially a corporation; therefore, it offers the advantage of liability protection for its directors, members and officers. If the nonprofit accumulates a debt, individuals associated with the nonprofit are not personally liable for the debt. If a creditor is owed money by a nonprofit, the creditor can only pursue the nonprofit's assets for payment. However, the director of a nonprofit must act responsibly and in the best interest of the nonprofit concerning the organization's financial matters. Failure to do so may result in the director being personally responsible for outstanding debt.

Grant Eligibility

Nonprofits usually raise revenue differently than for-profit organizations. A nonprofit depends greatly on the contributions of others to finance its operations. An advantage of a nonprofit with 501(c)(3) status is the ability to apply for public and private grants. Grants allow nonprofits to expand programs, hire staff, purchase equipment and rent facilities. A nonprofit that receives grants must use the money according to the guidelines established by the grant-giving agency. Most grant-giving agencies require nonprofit organizations to supply a copy of the nonprofit's IRS determination letter verifying federal tax-exempt status.

References

• Community Technical Assistance Center: Incorporating as a Non-Profit in Pennsylvania
• Internal Revenue Service: Exemption Requirements- Section 501(c)(3) Organizations
• Texas Secretary of State: Corporations and Trademarks Fee Schedule

Resources

• Internal Revenue Service: Exemption Requirements- Tax Exempt Status for Your Organization
• U.S. Small Business Administration: Non-profit Organization