A reader asked:
“I am the founder of a not-for-profit organization that advocates for maternal mental health. Our organization brings together stakeholders to discuss this topic and the organization educates the general public about maternal health issues. We hold monthly calls and host forums and teleseminars. This year, our organization will have increased revenue through contributions, sales of product, and event registration fees.
"What type of nonprofit should we be considering? Does an unincorporated association make sense? I haven't done any other state filings. We are not a registered 501c3. Right now I'm leaning toward not needing a non-profit 501c3 tax status, since we don't plan on needing to write grants. We are doing this work in our volunteer ‘spare’ time.”
It appears that the reader’s organization serves an important community need: educating the general public and certain sectors on maternal mental health issues. In deciding what business form the nonprofit organization should take on, the group may want to consider the benefits of forming as a nonprofit corporation, as opposed to an unincorporated nonprofit association.
Benefits of being a nonprofit corporation in one’s state may offer the organization’s leaders and volunteers certain liability protections, may allow enhanced public perception of the organization, and may simplify the process for applying for tax-exempt status with the IRS. I have summarized some points for the reader to consider here.
What Is a Nonprofit?
The word “nonprofit” generally is used to describe organizations that work to serve a public purpose, rather than to provide financial benefit to any particular individual, corporation, or entity. Most nonprofits are organized around a particular mission or community goal. Such groups often work to address an unmet community need.
There are many terms used to describe these nonprofit organizations. Some people may mistakenly call a nonprofit organization a 501(c)(3) or “tax-exempt group.” Actually, many nonprofits are generally organized and operated as both nonprofit corporations and tax-exempt entities.
- Nonprofit status refers to incorporation status under state law.
- Tax-exempt status refers to IRS and state income tax exemption.
The State Law – What Types of Nonprofits Are There?
Nonprofit corporate status is a state law concept. Your Secretary of State’s website should provide information on what types of business entities nonprofits can operate as and how to set up such entities.
Nonprofit organizations can take several different business forms. Many nonprofits decide to incorporate as a nonprofit corporation; others decide to operate as an unincorporated nonprofit association. Some states also allow charitable trusts and certain limited liability companies to operate as nonprofits. However, the most common form is the nonprofit corporation.
Nonprofit Corporation – Reasons Some Nonprofits Decide to Incorporate:
- Permanence of organization;
- Liability protection for individual leaders of the organization in some circumstances;
- Separate entity -- the organization is a legal entity separate from the individuals who founded it or who manage it;
- Reduced postal rates; and
- Potential tax benefits (federal, state, local) if the corporation seeks tax-exemption - among others.
Unincorporated Nonprofit Association
Some nonprofit organizations decide to remain unincorporated, as these groups are fairly easy to establish and have an informal and flexible form.
There are some drawbacks that an unincorporated nonprofit association may consider, including:
- Unincorporated associations may still have to follow the same legal requirements as nonprofit corporations, including filing annual tax forms, completing charitable fundraising registrations, and filing local business forms and other reports, depending on the state;
- Recognition – not all states recognize unincorporated nonprofit associations; such unincorporated groups may have to review what rights and protections your group will have under those particular state laws;
- Fundraising – donors often prefer to give to organizations that have been incorporated and that have tax-exempt status;
- Potential issues with lenders; and
- Potential contract and tort liability of an association’s officers and its members, among other issues.
Whether a nonprofit organization is a nonprofit corporation or an unincorporated nonprofit association, the group may want to seek tax-exemption from the IRS and their state.
Tax-exempt status offers many benefits, including:
- Exempt from paying corporate income tax on income generated from activities that are substantially related to the charitable purposes;
- Individuals and certain organizations can make tax-deductible contributions to the nonprofit organization;
- Groups may save money on state taxes when purchasing goods and services for use by the organization, and more.
You may be interested in learning more from the 501C Nonprofit Law Blog:
- Does a Nonprofit Need Tax-Exempt Status?
- What Do I Need To Consider Before Starting a New Nonprofit?