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Knowledge Base
Q:
What are the advantages/disadvantages of becoming a nonprofit organization?
A:
Advantages

Tax exemption/deduction: Organizations that qualify as public charities under Internal Revenue Code 501(c)(3) are eligible for federal exemption from payment of corporate income tax. Once exempt from this tax, the nonprofit will usually be exempt from similar state and local taxes. If an organization has obtained 501(c)(3) tax exempt status, an individual's or company’s charitable contributions to this entity are tax-deductible.

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Eligibility for public and private grants: Nonprofit organizations are allowed to solicit charitable donations from the public. Many foundations and government agencies limit their grants to public charities.

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Formal structure: A nonprofit organization exists as a legal entity in its own right and separately from its founder(s). Incorporation puts the nonprofit's mission and structure above the personal interests of individuals associated with it.

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Limited liability: Under the law, creditors and courts are limited to the assets of the nonprofit organization. The founders, directors, members, and employees are not personally liable for the nonprofit’s debts. There are exceptions. A person cannot use the corporation to shield illegal or irresponsible acts on his/her part. Also, directors have a fiduciary responsibility; if they do not perform their jobs in the nonprofit's best interests, and the nonprofit is harmed, they can be held liable.

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Given these advantages, why would you not want to incorporate as a nonprofit?

Disadvantages

Cost: Creating a nonprofit organization takes time, effort, and money. Because a nonprofit organization is a legal entity under federal, state, and local laws, the use of an attorney, accountant, or other professional may well prove necessary. Aside from legal or other consultant fees, applying for Federal tax exemption can cost $200-$850 or more, in addition to state fees for incorporation.

Paperwork: As an exempt corporation, a nonprofit must keep detailed records and submit annual filings to the state and IRS by stated deadlines in order to keep its active and exempt status.

Shared control: Although the people who create nonprofits like to shape and control their creations, personal control is limited. A nonprofit organization is subject to laws and regulations, including its own articles of incorporation and bylaws. In some states, anonprofit is required to have several directors, who in turn are the only people allowed to elect or appoint the officers who determine policy.

Scrutiny by the public: A nonprofit is dedicated to the public interest; therefore, its finances are open to public inspection. The public may obtain copies of a nonprofit organization’s state and Federal filings to learn about salaries and other expenditures.

More articles on starting a nonprofit»

Selected resources below may also be helpful.

Books & Articles

Check title availability at our libraries and Funding Information Network partners or your local libraries.

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