Nonprofit organizations (“NPO”) are very complex in nature and have certain formalities (both legal and tax) that need to be adhered to from the start of the organization until its termination. Failure to follow such formalities may subject the nonprofit to voluntary or involuntary termination of the exemption status. Not for profit organizations differ from for profit organizations because they receive their tax-free exemption from the IRS. Also there is no option for S Corporation status for nonprofit corporations. The key requirement to qualify for the exemption is that the NPO must be organized and operated exclusively for one or more exempt purposes including: religious, charitable, scientific, public safety, literary, educational purposes, for the prevention of cruelty to children or animals, and/or certain amateur sports.
As an overview of the process, incorporation of a nonprofit starts with filing articles of incorporation with the division of corporations in the state where the entity operates. The filing fees and filing requirements vary from state to state. The corporation should then obtain a federal tax identification number and local licenses/permits necessary to operate. Next, the organization must file an application for exemption status with the Internal Revenue Service. Upon receiving an approval as a charitable organization, there are certain annual filings that are required to maintain the exemption status. Finally, the nonprofit corporation must be carefully monitored to not inadvertently terminate the exemption status. It is important that the officers and/or directors understand and follow the guidelines for operating the entity as a charity.
Learn more about nonprofit corporations:
- Overview of Nonprofit Organizations
- Incorporating the Nonprofit Corporation
- Types of Tax-exempt Organizations
- Qualifying as a 501(c)(3) for Tax-exempt Status
- Required Annual Filings to Maintain the Tax-exempt Status
- Termination of 501(c)(3) Exemption Status
Learn about other entity choices:
- Sole Proprietorship
- General Partnership
- Limited Partnership
- Limited Liability Company
- For-Profit Corporations
- Non-Profit Corporations
- Professional Entity Structure
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