Non-Profits – Bent Enterprise

Forming a Non Profit Organization

NPO, or the Non Profit Organization is referred to the organization where the profits or the net income from any of its transaction is not distributed to its shareholders but is rather used to help achieve the goals for which the organization was formed.

There are many purposes for which the NPO or the Non Profit organization is created. In many cases it is for a charitable reason, or for a religious purpose or with educational goals behind it. For examples, organizations like hospitals, schools, museums, places of worship, food banks, trade unions, shelter for homeless, fraternal organizations, etc. Any volunteer organization which does not partake in the profits generated by the organization can be accounted into this category. The NPOs have to be either organized as corporations or associations or as trusts.

Non Profit corporations

Setting up your NPO as a corporation rather than a trust or an association, will help you to enjoy the benefits of a for profit corporation. The best advantage is the limited liability protection that the Non Profit Corporation offers to its owners/ shareholders, the board of directors and the elected officers. They do not have to use their personal assets or homes or bank accounts to settle for any debt or liability of the NPO, set up as a corporation.

Also when you have non-profit corporation, you gain exemption from several state and federal laws on taxation and also on property tax to which you would be liable if you were a for profit business. Of course, you need to apply the exemptions separately. Again, you would stand to benefit more in terms of lower rates with the US Postal service, etc.

Of course, unlike the case in for profit organizations, the NPOs require you not to distribute the profits with the shareholders, and you can also not contribute to campaigns related to politics or engage in lobbying for politicians. There are very few exceptions to this rule.

How to form a Non Profit Organization?

There are multiple steps involved in setting up a NPO (Non Profit Organization).

  • Formation of the corporate Non Profit entity: To start with you should first form a corporate entity in any of the states in US. The process is somewhat similar to that of forming a corporate entity for a for-profit organization. However there are requirements that are very specific to forming an entity for non-profit which has to be followed. The fees levied by the state will also be slightly lower than that of the for-profit organizations.
  • Application for exemption from Federal tax: After the formation of the non-profit corporate entity, the next step is to apply for exemption from the federal tax. The section 501(c)(3) of the IRC (Internal Revenue Code) refers to the tax exemption used very commonly by the non-profit organizations in US and it is for this reason, the non-profit corporations are often referred to as the 501(c)(3) companies. The application for the exemption is pretty long and is quite complicated. It would be better to have a specialist fill in the details on your behalf. The application when successful, will end up with the non-profit organization gaining the tax exemption status, granted by the IRS. After this there is just one more step left to form the Non Profit organization.
  • Application for exemption from state tax: This is for gaining exemption from the tax of the state in which the NPO is incorporated. Most of the states will provide this status automatically based on the 501(c)(3) and the formation documents. However, some states might require you to fill in a separate application form.

The formalities are not over once you have formed the NPO and gained the tax exemption from State and Federal tax authorities. There are many more formalities that one has to observe on a daily routine and ensure that the tax filing is done on time with the IRS. Similar to the for-profit organizations, the NPOs are also required to observe many corporate formalities like regular board of directors meeting where the minutes are duly recorded and retained.

Additionally, the NPOs have to keep a detailed record of all the financial and non-fiscal activities, it has been involved with every day. It is imperative to have records of financial assistance received by the organization like the grants, contributions, sponsorships and more. This is very important to attribute the status of private foundation of the organization.

If the organization is qualified under the section 501(c)(3), then the organization has to file a annual return comprising of Form 990-PF or Form N-990, Form 990-EZ and Form 990. Apart from this there are also requirements at the state level to be followed by the NPOs. A consultation with a professional accountant will help you understand and file according to the requirements. Irrespective of whether the NPO has any employees or not, it is important for every company qualified under the section 501(c)(3) to have a EIN (federal tax id) number.

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