Before You Incorporate as a Nonprofit - Pros & Cons

As a nonprofit corporation, your organization is eligible for state and federal exemptions from corporate income taxes plus certain other taxes. Federal corporate tax rates can run as high as 34% while state corporate taxes can take a bite as well. If you expect to earn substantial amounts of money from your services, exhibits, product sales, or performances, you'll likely want to seek an exemption. A tax-exempt nonprofit will also save on local taxes such as levied by your state, and county.

As a 501(c)(3) nonprofit corporation you will be able to receive grants and donations. Tax-exempt government foundations such as the National Endowment for the Arts or Humanities and private foundations such as the United Way or the Ford Foundation are required to give funds only to 501(c)(3) organizations.

Individual donors to your nonprofit corporation can claim personal federal income tax deductions for their donations, and bequests will be exempt from federal estate taxes.

Shielding members of your organization from personal liability is key among the benefits of nonprofit incorporation. Board members, officers, and employees of your organization will be protected from liability for corporate debts or liabilities such as unpaid organizational debts or lawsuits against the organization. Creditors can go after only your corporate assets, not the personal assets of the people who manage, work for, or volunteer for your organization.

A corporation is a legal entity separate from individuals who manage it or organize it. It is this separate legal existence that affords the protection from liability, but it also means that the organization becomes immortal in a way. The nonprofit corporation continues to exist beyond the lifetime or involvement of the people who began it or who have managed it. The fact that the organization continues in this way is attractive to donors who want to fund a cause over the long term.

Being a corporation opens the door for employee benefits such as group life insurance, health insurance, a pension plan, etc. These benefits are not available to the workers in unincorporated organizations.

Forming a nonprofit corporation is not simple but the documents required do force the group to be clear about its mission, think through its operating rules, and develop procedures for decision making. This is especially important for a nonprofit whose board members may come with diverse interests and viewpoints. Clear-cut delegation of authority and specific operating rules embodied in the articles of incorporation and the bylaws will make running the organization easier and less divisive.

Miscellaneous benefits include exemptions from county real and personal property taxes; lower postal rates on third-class bulk mailing; cheaper advertising rates; the ability to air free radio and television public service announcements (PSAs), and many others depending on the activities your organization engages in.

Disadvantages include a lot of paperwork; costs such as hiring a lawyer to prepare your papers; and time and energy to comply with regulatory demands and to grow your organization.

There will be restrictions too, such as no pay for your directors, no political campaigning or lobbying, and when your organization folds, its assets must be given to another nonprofit.

But if the benefits of becoming a nonprofit corporation make sense and outweigh the disadvantages, you may be ready to move ahead.