A simple breakdown of why you may want to incorporate your nonprofit, the benefits of doing so, and how to do it!
Forming a nonprofit corporation (a distinct legal entity) is different from federal or state tax exemption (a tax classification). For organizations seeking tax exemption, incorporation is almost always the first step.
Take this time to reflect and look at your organization...
✅ Do you have a mission with a clear charitable purpose?
✅ Do you have other individuals who want to be involved as volunteers or directors?
✅ Have you already begun operations?
✅ Are you ready to collect donations?
Do you have plans to do any of the above?
If you answered yes, it might be time to incorporate.
IS IT REQUIRED FOR A NONPROFIT TO INCORPORATE?
Individuals wanting to run charitable programs may, but are not required, to form a nonprofit corporation. Nonprofit organizations that choose not to incorporate typically operate either as a sole proprietor (technically no different from a sole proprietorship operating as a business) or as a an “unincorporated association” (which is essentially a group of people working together but without forming a separate entity). Typically, a nonprofit that depends on minimal funding and conducts limited activities does not need to incorporate.
If the nonprofit does not incorporate, it is not required to file any organizing documents unless it seeks tax-exempt status from the Internal Revenue Service.
DECIDING WHETHER YOU SHOULD INCORPORATE:
The decision whether to incorporate depends on your mission as well as your current and planned activities. One of the primary reasons for incorporation is limited liability protection of the directors, credibility, and tax purposes.
Without forming a legal entity, the members' and directors' personal assets (home, retirement savings…everything) are at risk should a lawsuit arise related to the activities the group has undertaken. Incorporating provides limited liability protection, which means only the organization's assets can be targeted.
Also, while incorporating as a separate entity is not technically required by the IRS to obtain 501(c)(3) tax-exempt status, as a practical matter it simply makes sense to incorporate in the vast majority of situations. If an unincorporated association desires to obtain tax-exempt status and has over $5,000 in annual revenue, it must file a Form 1023 Application for Tax Exemption with the IRS. And in doing so, the unincorporated association will have to adopt bylaws and many other documents just like nonprofit corporations do. Practically this means that operating as a charitable unincorporated association provides little to no benefit compared to operating as a nonprofit corporation while missing out entirely on the benefits of incorporation.
Additionally, forming a nonprofit corporation adds legitimacy to your organization and its mission. The suffix “Inc.,” a bank account, and existing in the state's records are solid trust factors for your community and potential donors.
More on the other reasons you may want to incorporate your nonprofit below:
SPECIFIC SITUATIONS TO INCORPORATE A NONPROFIT:
These are five situations in which it could be well worth the time and trouble to incorporate as a nonprofit corporation:
- When you are applying for public or private grant funds
- When you want to ensure that you have tax-exempt status
- When you will solicit tax-deductible donations or contributions
- When you want to limit personal liability from the organization's activities
- When any potential political activities could lead to lawsuits
For the vast majority of nonprofits, the advantages of incorporating outweigh the costs and complexity of filing.
THINGS TO CONSIDER BEFORE INCORPORATING:
- Time & Money. The last element to consider is budget, both time and money. State fees (and later, IRS fees) are not cheap, nor is the paperwork or terminology easy to figure out! Keep in mind your budget as well as the time you'll have available to spend to really get your nonprofit set up.
- Are you still in the idea or planning phase? If your organization is in the “idea phase,” where you have the desire, but haven't made plans to determine whether your idea is feasible, it probably is not the best time to consider incorporating.
- Paperwork, Paperwork & More Paperwork Whether it's in the process of forming your nonprofit, incorporating, or filing taxes...unfortunately, the paperwork can seem endless. It's important to make sure you understand what type of structure your nonprofit is best suited for so that you can make sure you file the right paperwork as well. NOTE: *this is when knowledgeable nonprofit legal counsel is especially important.
Starting a nonprofit is more like a business than many people realize, so you'll need thorough planning to get started. Don't be discouraged. The better your plan, the better your chances at fulfilling your mission! If you're in the process of considering your options when it comes to forming a nonprofit, you can read more about those specific steps here.
ONCE YOU'RE READY TO INCORPORATE:
Nonprofits are incorporated at the state level, often in the state in which they primarily operate. Please note that for a nonprofit to gain tax-exempt status, it must also file Form 1023. If a nonprofit never obtains tax-exempt status with the IRS, it is a taxable entity.
Taxable corporations must file Form 1120 and pay income tax. Conversely, a nonprofit that has obtained tax-exempt status generally does not have to pay income taxes (except for organizations that receive unrelated business income and must pay the associated tax) and files Form 990.
To incorporate, the organization must file Articles of Incorporation, typically with the Secretary of State. Some states even have standards forms that can be used. This is true for both Kansas and Missouri. The Articles are easy enough to file, but please note that if you plan on applying for tax-exempt status you will need additional language in the Articles beyond that required by the state! We've seen many times individuals who self-filed their Articles but neglected to include the language required by the IRS, which meant they had to go back and file Amended Articles of Incorporation before applying for tax exemption.
A nonprofit corporation also must have a Board of Directors who are charged with governing the organization and ensuring that it operates in a charitable manner. The Board must then approve the bylaws and other basic documents.
If the nonprofit corporation will want to open a bank account, apply for tax exemption, or most anything else, it will need a federal Employer Identification Number, which can be applied for online.
When it comes to making decisions for your brand new nonprofit, it is critically important to make sure that you're doing what's best for you, the organization, and most importantly your charitable mission. Even though the legal issues surrounding starting your nonprofit, IRS compliance, and more can seem overwhelming, our Missouri and Kansas nonprofit attorneys are here to take the legal load off your shoulders. Mission Counsel was built on the foundation that your mission comes first, so let us help you achieve that mission!
If you still have more questions or need to seek legal advice, we are here to help! Our clients are organizations serving on the front lines of making our community and world a more equitable, just, and enjoyable place. These clients deserve the same world-class legal counsel normally reserved only for those organizations large enough to afford the big traditional law firms. Click here to schedule a free 15-minute Mission Discovery Session with us.