Starting a non profit corporation is a goal for many philanthropic entrepreneurs. It might seem like a daunting process to many, which is why we created a guide on how to start a non profit corporation where we explain the process step by step.
In this guide, you’ll learn what a non profit corporation is and the different types that exist. Additionally, we will go over every imperative step in the process of creating a non profit corporation and explain in detail what each entails. At the end of our article, you’ll find an FAQ section that contains some pressing questions regarding this process.
Without further ado, it’s time to delve into the world of non profit corporations.
What Is a Non Profit Corporation?
A non profit corporation is an organization that’s created for educational, literary, scientific, or charitable purposes, the main aim being to contribute to the public good. The difference between other types of corporations and non profit corporations, as their name suggests, is that the latter don’t work solely for the creation of profit. All the profit generated by a non profit corporation is directly reinvested into the corporation, whereas other types of corporations work primarily to generate profit for their owners and shareholders.
Non profit corporations are exempt from paying taxes on a state and federal level from the IRS, according to Code Section 501 (c)(3). In addition, any donation made to a non profit corporation, or any money raised from fundraisers or similar events, are also tax-deductible.
A non profit corporation qualifies for tax exemption if it offers some services or goods to the public.
There are various regulations owners of non profit corporations have to comply with to maintain their non profit status. Moreover, they have to disclose their finances to the public and refrain from taking any political sides or operating for any political purposes.
Types of Non Profit Corporations
There are many different types of non profit corporations, but today we will focus on the four main types: charities, social advocacy organizations, foundations, and trade organizations.
Charities, also known as 501(c)(3) organizations, are organizations whose aim is to provide free services and goods for the public. They usually get their funding from donations and fundraisers. Popular charities include the Salvation Army, Save the Children, and the Red Cross.
Social advocacy organizations, as their name implies, are types of organizations that are started with the sole purpose of promoting a specific social cause. Just like charities, they raise money through donations and fundraising events. There are many social advocacy organizations, such as the Human Rights Campaign.
Then there are foundations, which can be either private or public. They are also classified as 501(c)(3) organizations, just like charities. They are usually founded by individuals who are quite wealthy, with the purpose of supporting some kind of cause. There are different regulations when it comes to starting and maintaining foundations, such as donating a certain percentage of their income to maintain their status as a foundation. Usually, foundations are associated with a for-profit corporation that contributes to the funding. Some well-known foundations include the Ford Foundation, the Bill and Melinda Gates Foundation, and the Novo Nordisk Foundation.
Lastly, trade organizations are organizations that work to improve the conditions of individuals who partake in the organization and promote collaboration between different companies. Usually, they are founded by businesses that operate in a certain industry. Some established trade organizations include the World Trade Organization (WTO) and the European Union.
Benefits of Non Profit Corporations
Now that we explained what non profit corporations are and how they get their status, it’s time to go over some of the most pertinent benefits that come with forming one.
The biggest benefit of forming a non profit corporation is that you won’t have to pay taxes on a federal or state level. Once you’ve finished your applications for a tax-exempt status, you get to enjoy all the benefits that come with it.
There are other financial benefits as well. For instance, non profit corporations are more likely to receive discounts from retailers and suppliers. Plus, their tax exemption status attracts more investors because their donations will also be tax-deductible. They are also eligible to receive various types of public funds and grants, making it easier than ever to raise their required capital.
Limited Liability Protection
Like most corporations, non profit corporations also grant their owners and members limited liability. This means that, in case of a lawsuit, claim, or debt, they will be protected from any prosecution or asset forfeiture.
Working for a non profit corporation is extremely rewarding for its members and owners. You are helping out communities and making the world a better place, which is an incredibly satisfactory pursuit. The feeling of contributing to society in a meaningful way can help deal with any rough periods that the corporation goes through, which is another plus.
Another benefit of non profit corporations is their perpetual existence. Other business structures like sole proprietorships are extremely fragile in this regard, but non profit corporations can exist even if one owner dies or decides to withdraw from their position.
Drawbacks of Starting a Non Profit Corporation
Like with any other business structure, there are a few disadvantages associated with starting a non profit corporation which we will explore below.
Non profit corporations are constantly under pressure to perform well and get good results. The potential backlash they might face can be a lot to deal with, and many members of non profit corporations find the working environment stressful at times for this very reason.
Lack of Personal Profit
Needless to say, members and owners of non profit corporations don’t work for profit, so they can’t receive any type of payment or salary for the work they do. They are expected to volunteer their time and energy into the company without any financial gain in return.
Loads of Paperwork
Corporations are no strangers to paperwork, but members of non profit corporations are especially plagued by endless piles of paperwork. They are expected to keep annual records, in addition to the initial formation documents. This can be very time and energy-consuming and it can take away from investing in other areas of the business.
How to Start a Non Profit Corporation
Here are all the steps required for you to start a non profit corporation.
Draft a Mission Statement
Every non profit corporation needs a mission statement that details the purpose of your corporation, what you plan to achieve, who can benefit from it, and what kind of values it represents. Not only are mission statements extremely useful for attracting new clients, they can also serve as a reminder to everyone working in the corporation about why you started your non profit in the first place, keeping everyone motivated in the long run.
When drafting the mission statement, try not to use overly flowery language; instead, keep it simple and straightforward to ensure that everyone understands your points. Be as direct and to the point as possible and avoid using complicated jargon. Remember, a mission statement serves as the foundation for your business, so do your best to write one that is representative of your values.
Choose a Name for Your Non Profit Corporation
One of the first steps in forming any kind of business is choosing its name. This step might seem easy at first glance, but many business owners struggle to find the right name for their business. Your business name has to be entirely unique, so doing a trademark research is always a good idea when you’re brainstorming name ideas for your business.
Additionally, ensure that your name represents your mission and values to the best of your ability. Consult your fellow members and see which name appeals to you most. Many non profit corporations use abbreviations, so feel free to resort to that if your name seems too long.
Depending on the state in which you’re conducting your business, you might be asked to include a certain word in your name, such as “Corporation” or “Ltd”.
Form a Board of Directors
Every corporation is required to form a board of directors during the incorporation process. The job of the board is to supervise the corporation, make business-related decisions, and oversee the operations.
The board of directors plays a crucial role at the start of the business since they are the ones who ensure that the corporation meets all the legal requirements for incorporation. It’s important to select experienced, passionate members who will generously dedicate their time to the corporation’s growth and have its best interests at heart. In addition, having experience in marketing or finances wouldn’t hurt.
When you have selected your board of directors, it’s time to move on to the next step.
File Articles of Incorporation
A crucial step in every incorporation process is filing articles of incorporation with the Secretary of State’s office. Keep in mind that the laws and regulations vary from state to state, so check the specific requirements for your state before you begin. If you don’t have a lot of time on your hands to dedicate to research, you can always hire a legal consultant who will guide you through this process. There are many lawyers and consultants who work pro bono with non profit organizations, so we have no doubt you’d be able to find one in your state.
The articles of incorporation are a document that helps separate your corporation as a business entity. This document includes information such as the name of your business, its location, the names and addresses of the members, information regarding the type and number of stock you will issue, and similar important information related to your business.
Apply for an EIN
To get incorporated and apply for tax-exempt status, you need an EIN (Employee Identification Number) for your business. The application process is relatively simple and easy – once you determine that your business is eligible for an EIN, you can complete an online application available on the IRS website. It’s recommended that you complete the application in one session. Once it’s been approved, you will have instant access to your EIN.
File for Tax-Exempt Status
Last but not least, all non profit corporations need to file for tax-exempt status. To achieve this status, you need to file Form 1023-EZ on the IRS website. Before you proceed to the form, ensure that you’ve read and understood the legibility requirements.
After you’ve received your tax-exempt status, you will have a few tasks to complete on a regular basis, like keeping a detailed record of all the activities related to your business. Ensure that you keep track of all the expenses, profits, and grants, and remember to keep a record of your bank statements. These are all necessary to maintain your tax-exempt status in the long run.
Can You Start a Non Profit and Make Money?
When you create a non profit, you won’t be able to generate any of the revenue for your personal benefit. Instead, you’re expected to reinvest all the profit back into the corporation.
Can I Be the CEO of My Own Non Profit?
Yes, non profit corporations can have CEOs, so there is no reason why you couldn’t be the CEO of your own corporation.
How Difficult Is It to Start a Non Profit?
Truth be told, starting and running a non profit is a much more difficult endeavour than some other types of corporations. You’re expected to come up with an idea about how your business will help the public, think of strategies to raise a sufficient sum of money, hire staff and volunteers, and ensure that you’re complying by all the necessary regulations at all times.
We hope that this article provided you with all the relevant information you need to start a non profit corporation.
Compared to other types of corporations, non profit corporations are harder to both start and operate. There are tighter regulations and rules the owners need to comply to, finding funds can be trickier, and it requires a lot of commitment and dedication. However, with the right mindset, planning, and colleagues, it’s more than achievable.
While they might be harder to manage, there are also many benefits owners and volunteers get to enjoy, such as having tax-exempt status, limited liability, and the rewarding feeling of contributing something great to the world.