501(c)(3) Nonprofit Corporation
Nonprofit corporations do share some common attributes with profit corporations-for example, limited liability. However, there are many advantages to forming a tax-exempt 501(c)(3) nonprofit corporation. Tax exemptions, receiving public and private funds, separate and perpetual legal existence, employee benefits, formality and structure as well as many other advantages. To qualify for your federal nonprofit tax exemption, you will want to organize and operate your nonprofit corporation for Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals.
The 501(c)(3) Nonprofit Corporation offers federal corporate income tax exemption under Section 501(c)(3) of the Internal Revenue code. IRC § 501(c)(3) nonprofits must be organized for religious, charitable, educational, scientific or literary purposes. This entity is not only exempt from corporate taxation under federal and state tax statutes, but also eligible to obtain tax-deductible contributions from donors and other benefits not available to other tax-exempt nonprofit organizations.
- Tax exemptions – eligible for state and federal exemptions from payment of corporate income taxes, as well as other tax exemptions and benefits.
- Receiving Public and Private Funds – eligible to receive both public and private grants.
- Limited liability – directors, trustees, officers, employees and members are not personally liable for corporate debts or liabilities.
- Separate legal existence – a nonprofit corporation is a legal entity separate from the people who manage and work for it, or participate in its activities-a legal “person,” capable of entering into contracts, incurring debts, receiving and maintaining funds, and, generally, doing anything a real person can do.
- Continuity of life – exists as a legal entity despite changes in management or other corporate personnel caused by the resignation, removal or death of the people associated with it.
- Employee benefits – the principals can also be employees and, therefore, be eligible for employee fringe benefits.
- Formality and Structure – the formation documents show clear-cut delegation of authority and specific operating rules to run the organization providing procedures for decision-making and dispute resolution.
- Additional benefits – lower postal rates, cheaper advertising rates, free radio/television public service announcements, lower membership rates offered by the “big box” stores.
- Paperwork – requirements regarding the organizational paperwork including additional fees, compliance with the day-to-day operational rules and, required periodic filings with state and federal agencies.
- Governance responsibilities:
-Acquisition of sufficient resources to enable the organization to fulfill its mission – Clearly articulated goals and objectives, a positive public image, strategic planning, and collaborative endeavors contribute to an organization’s capacity for attracting resources. Organizations lacking in these areas encounter difficulties in raising funds and volunteers to support their cause.
-Sound administrative practices, professionalism among staff, good internal and external communications, and effective board governance contribute to the overall health and well being of the nonprofit. Organizations that do not use their resources effectively limit their ability to make a social impact on society.
-The boards of nonprofit organizations can either be part of the problem or part of the solution with respect to the acquisition of resources or use of existing resources.
- Fund Raising – scrutiny by the public, the donors supporting the cause, governmental agencies and the fund-raising community have demanded cost efficiency (percent of budget used for fund raising) to determine the effectiveness of a nonprofit organization and also as an indicator of fraud.
- Must file IRS Form 990 (or Form 990-EZ), annual Return of Organization Exempt From Income Tax.
- State Nonprofit Corporation Tax Returns and Reports are also required.
- Federal and state employment (payroll) taxes must be withheld and paid on behalf of the employees.
- Corporate staff and other compensated corporate personnel must report and pay taxes on employment compensation on their individual income tax returns.
- Sales, Use, Excise and other state taxes may apply (some exemptions may be available).