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Five Reasons to Incorporate Your Nonprofit Association

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Americans are famous for volunteering for good causes and for banding together to get things done,whether the goal is wildlife rescue or low-income housing. If you're involved in a fledgling nonprofitorganization, you and the other folks active in the group have probably wondered whether or not youshould incorporate. But it sounds complicated and expensive. Who has the time or money?

Becoming a nonprofit corporation does require some paperwork, and some money -- but for many groups,it's worth it. To form a nonprofit corporation, one of the organization's founders prepares and filesstandard Articles of Incorporation -- a short legal document that lists the name and directors of thenonprofit, plus other basic information. The Articles of Incorporation are filed with the Secretary of State's office for amodest filing fee in the state where the nonprofit has its operations or headquarters.

In addition, your nonprofit will want to apply for and obtain a federal and state nonprofit tax exemption,which frees you from having to pay income taxes on profits made from engaging in your nonprofitactivities, makes you eligible for charitable tax deductible contributions from donors, and qualifies you forlocal real and personal property tax exemptions. It's often best to obtain your state tax exemption beforefiling your Articles of Incorporation with the Secretary of State -- by doing this, you get to file your Articles without making thetax payments that your state requires of nonexempt corporations. For example, in California, if you filenonprofit Articles after getting your state tax exemption, you pay just $30; if you file before you get theexemption, the fee is $830 (you pay the extra $800 required to form a nonexempt corporation).

Here are five circumstances that may make it worth your while to incorporate:

  1. You want to solicit tax-deductible contributions.
    If your organization becomes a tax-exempt nonprofit corporation, donors can deduct their gifts to yourgroup on their federal and state tax income returns.
    Let's say your group, For Shore United, wants to sponsor monthly cleanup drives to pick up and haul awaytrash left along the local shoreline. You've enlisted a sufficient number of enthusiastic volunteers, but youneed funds to rent a truck, buy gas, and pay for volunteers' meals. You know that many in your local communitywould be willing to chip in and help fund your effort, but only if your group were a recognized publiccharity eligible to receive tax-deductible contributions. You decide to incorporate as a nonprofitcorporation and apply for tax-exempt status to accomplish this objective.
  2. Your association makes a taxable profit from its activities.
    If your group will show a profit from its activities, incorporating as a nonprofit can yield a great benefit:You won't have to pay income tax on the money you make.
    For example, take an educational nonprofit association, Better Books and Learning, which began as apart-time effort by a few dedicated individuals who led book reading groups for disadvantaged youth. Allexpenses were paid out of pocket by the volunteers, and the group never turned a profit.
    But now, a board member of a local junior college has heard about the good work and asked the group tosubmit a bid for a consulting contract to the college. The group would be paid for administering andrunning book reading and discussion groups as part of the college curriculum. The bid is accepted by theboard of the college -- and the group will now show a profit from its educational activities. It decides toincorporate as a nonprofit and seek tax-exempt status with the IRS to avoid paying income tax on moneygenerated by the consulting contract.
  3. You want to apply for public or private grant money.
    Sorry, but without being recognized as a tax-exempt nonprofit by the IRS, your group is unlikely to qualifyfor grants. You could form a nonprofit tax-exempt association, rather than a corporation, but preparingand filing the standard incorporation forms is simpler and easier. (Tax-exempt associations require acustomized charter and set of operating rules.) Further, the IRS generally has an easier time approvingtax exemptions for nonprofit corporations -- this is the type of nonprofit legal entity it's used to seeing.
  4. Your members want some protection from legal liability.
    If your group might be the target of a lawsuit, incorporation can provide welcome peace of mind.Nonprofit corporations can still be sued -- but their individual members and directors are generallyprotected from personal liability. That's not true of an unincorporated association. In addition, reasonablypriced insurance is available to protect volunteer directors, who may be reluctant to serve without it.
    For example, Engineers for the Environment is a nonprofit educational consulting firm that helpsdevelopers prepare environmental impact reports for nonprofit housing and ensure compliance with stateand federal regulations. To avoid legal liability if projects are denied approval or if unforeseen federaland state guidelines cause costly delays with client projects, they decide to incorporate their organization.
  5. Your advocacy efforts might provoke legal quarrels.
    Nonprofits may engage in political advocacy only to an insubstantial degree, unless they elect to followspecial federal political lobbying rules. These rules limit the amount of money spent to further politicalcauses, such as sponsoring or opposing federal, state, and local legislation.
    For example, the primary purpose of No Smoke United, an antismoking nonprofit group, is to inform thepublic the health hazards of secondary smoke from cigarettes. But it also sometimes enters the politicalfray. One of its recent efforts is a campaign for local legislation banning cigarette advertising onbillboards in the community. It expects rapid and surefire response from cigarette advertisers and the adagencies they employ, including the filing of spurious, but expensive and time-consuming, lawsuits againstthe organization and its directors and officers personally. The members decide to incorporate beforebeginning the campaign, to insulate their directors and officers from personal liability and to allow thecorporation to approve indemnification provisions in its bylaws. These provisions will permit directorsand officers to be advanced or repaid expenses by the nonprofit corporation for any personal expensesthey incur for appearing in and defending lawsuits.

Copyright © 2000 Nolo.com Inc.

Related resources at inc.com:
Nonprofit Corporations Can Do Good Works and Make Money, Too
Upstarts: Serving Nonprofits

Last updated: Nov 1, 2000




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