State incorporation is usually the first step towards becoming a fully tax-exempt charity. But many startup orgs wonder if it is worthwhile to take this step. To help you decide, we've compiled a list of advantages and a few disadvantage to nonprofit incorporation and IRS exemption.
Benefit #1: No Taxes
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 be very high while state corporate taxes can take a bite as well. If you expect to earn substantial amounts of money from your mission-related 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.
Benefit #2: Ability To Receive Public And Private Donations
Once incorporated, most charities go on to apply for nonprofit designation from the IRS. As a 501(c)(3) nonprofit you will be able to receive grants and donations. In general, foundations are required to give funds only to 501(c)(3) organizations.
Benefit #3: Protection From Personal Liability
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.
Even if you do incorporate and receive some of these protections, it is wise to purchase liability insurance to cover some situations that may lie outside of incorporation law.
Benefit #4: Organizational Perpetuity
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.
Benefit #5: Employee Benefits
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.
Benefit #6: Corporate Structure
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, restrictions on lobbying, and when your organization closes, 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.
If you don't incorporate, you might be an unincorporated association.