Not-for-Profit Laws
Not-for-profit laws create the framework for charitable and service organizations to form and use their status to help society. Although most nonprofits use a corporate structure, organizations can form as trusts or cooperatives. Entities can also operate informally or call themselves endowments or foundations.
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Significance
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Although a not-for-profit can legally and morally trade for a profit, from a general perspective not-for-profits do not exist for generating a profit. This does not prevent a nonprofit entity from accepting, holding or distributing funds and participating in other activities of value. If the organization produces a profit, the entity usually channels the proceeds back into funding its mission or charitable objectives.
Section 501(c)(3)
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The federal tax code relieves some nonprofit organizations from the burdens of federal corporate income taxes. Donors look more favorably upon organizations with this exemption. Sponsors see them as viable charitable entities with the necessary foundational structure for reaching its stated objectives--as well as financially accountable. This regulation prohibits 501(c)(3) companies from becoming involved in legislative or political endeavors.
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Federal Returns
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The majority of tax-exempt entities must file an annual tax return or notice with the Internal Revenue Service. The law does not require religious institutions to meet this stipulation. If an organization does not file for three consecutive years, it loses its tax-exempt standing. This means the organization must file tax returns and pay any taxes due. In addition, donors can no longer claim deductions for their donations.
Categories
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The law recognizes two categories of not-for-profit corporate organizations--public charities and private foundations. Most individuals elect to have their organizations categorized as public charities to avoid the limitations and additional regulations the law imposes upon private foundations. It essential to indicate on the 501(c)(3) application that you want to be designated a public charity.
The founders must first form the venture to operate for charitable activities. Religious entities as well as scientific, educational and artistic organizations should also choose this designation. The mission, whether for a certain group or the general community, has to exist for the good of the community.
State Laws
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Each state has the authority to regulated not-for-profit entities formed under its jurisdiction. The laws govern the rules for establishing, structuring and managing nonprofits. Each state has specific requirements for filing the documents.
Limited Liability
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Similar to for-profit companies, the founding members, directors and other individuals involved with a nonprofit enterprise have limited liability protection for the debts and financial obligations of the organization. Although this protection extends to illegal acts for the actions of employees, directors or officers, individuals perpetrating the unlawful acts may still incur personal liability.
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References
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