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FAQ: Setting Up a Nonprofit Corporation


What is a nonprofit organization?

A nonprofit is an organization formed to fulfill a mission benefiting a community or society as a whole. A nonprofit organization does earn profits, but the profits can only be used to run the organization. Under certain conditions, nonprofits are exempt from federal taxes on their profits.

A nonprofit organization does not distribute its surplus funds to owners or shareholders, but instead uses them to help pursue its goals. Examples of NPOs include charities (i.e. charitable organizations), trade unions, and public arts organizations.

Why should I incorporate my nonprofit organization?

There are several benefits to incorporating for nonprofits:

  • Protection from personal liability: The executives and employees of a corporation (nonprofit or not) are protected from being held personally liable for the debts and actions of the corporation. Lawsuits will be directed at the corporation, not at individuals, and creditors can only seize the assets of the corporation, not the personal assets of its members.
  • Eligibility for tax-exempt status
  • Organizational perpetuity: The corporation continues to exist and operate beyond the lifespan or involvement of the founders, which helps to draw donors.

What kind of organizations are eligible to be tax-exempt nonprofit corporations?

The most common type of nonprofit corporations are referred to as “501(c)(3)” corporations after the section of the Internal Revenue Code where they are defined. These are corporations organized for religious, charitable, scientific, testing for public safety, literary, or educational purposes, to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. There are limitations on these corporations; they cannot benefit any private shareholder or individual, excessively carry on propaganda or otherwise attempt to influence legislation, or take part in any political campaign.

Many other types of organizations are also tax-exempt under Section 501, such as labor and agricultural organizations, business leagues, recreational clubs, fraternal societies, certain trusts and insurance companies, and organizations of past or present members of the Armed Forces.

What are the advantages of 501(c)(3) tax-exempt status?

There are advantages besides the obvious to holding tax-exempt status as a charitable organization. 501(c)(3) nonprofit organizations are eligible to receive grants from public and private foundations; tax-deductible donations from individuals; and bequests exempt from federal estate taxes. Tax exemption enables the organization to operate without federal income tax. This benefit often enhances the organization’s ability to accumulate income and assets and can therefore help the organization become more sustainable over the long-term.

How do I obtain tax-exempt status?

To obtain tax exempt status, you need to apply to be recognized as a tax exempt organization at the federal and state level. At the federal level, there are several forms and application materials you will need to submit to the IRS. Procedures at the state level vary from state to state.

How do I apply for 501(c)(3) tax exempt status?

To apply for tax exempt status with the IRS, you will need at least:

  • An employer identification number (EIN);
  • Organizing documents, such as Articles of Incorporation, Articles of Association, Constitution, adopted bylaws and other relevant document;
  • Description of the activities of your organization including the standards, criteria, procedures, or other means of carrying out these activities, which conforms to IRS standards for exempt organizations;
  • Financial statements showing receipts and expenditures for current year and preceding three years; or if you haven’t yet begun operation, a proposed budget for two full accounting periods and a current statement of assets and liabilities
The IRS may also ask for additional documents such as:
  • Representative copies of advertising placed;
  • Copies of publications of the organization;
  • Copies of leases, contracts, or agreements into which your organization has entered.

How long does it take for 501(c)(3) status to be approved?

It usually takes between four and nine months for IRS to review and approve 501(c)(3) applications. Sometimes it takes a little less and sometimes a little more. Expedited review can be requested if a new organization is being formed to provide immediate disaster relief or if a promised grant is both substantial relative to the organization’s budget and the grant has a specifically-defined expiration date.

The above is intended as a general introduction and should not be construed as legal advice or legal opinion for your particular case. Please contact the Law Offices of Yu & Associates with any specific questions. Tel: (301) 838-8986, Email: syu@yulegal.com, Address: 110 N Washington Street, Suite 328E, Rockville, MD 20850.




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