A non-profit corporation is a type of organization commonly used as a means to support private or public charitable purposes. A non-profit may or may not be legally incorporated, however, incorporation is recommended. Non-profits are often used in the areas of the arts, religion, humanitarian efforts, childcare, homeless shelters, animal protection, politics, labor associations, education, research and others. Non-profits are entitled to file for state and federal tax exemption status. Section 501(c)(3) of the U.S. Internal Revenue Code exempts non-profit corporations from federal taxation.
One of the foremost advantages of a non-profit corporation is that of limited personal liability. As with other types of corporations, the officers and directors of a non-profit corporation cannot be held personally liable for the corporation’s debts or liabilities. In addition, property tax exemptions may apply. Donations to a non-profit organization are generally tax-deductible. Another important feature of a non-profit is eligibility for government and private grants.
A non-profit may be liable for taxes on profits that are obtained on activities outside of the non-profit’s primary focus. Further, no profits can be distributed to the non-profit’s active members or directors. Non-profit organizations are prohibited from lobbying or political fundraising. Additionally, when a non-profit is dissolved, all of its property and assets must be transferred to another non-profit or the tax-exempt status of the non-profit will be forfeited.
Steps in Creating a Non-Profit Corporation
In order to create a non-profit corporation, Articles of Incorporation must be filed with the state in which the non-profit intends to operate. The name of the organization, its initial board of directors, and the registered agent must be recorded. Corporate by-laws should be drafted that specifically spell out the limited liability of the organization’s board and active members.
Next, the non-profit should file for state and federal tax-exempt status. The non-profit is liable for all taxes until tax-exempt status is granted.
Limitations on Non-Profits
Retaining Non-Profit Status
A non-profit must take care to keep its non-profit status. Extensive recordkeeping on the sources of income are required. Corporate minutes, resolutions, and meetings must be properly maintained and documented. Taxes resulting from income produced by anything other than non-profit activities must be reported and paid. Further, in order to retain non-profit status, no profits may be paid to the organization’s directors or active members.
Liability for Directors and Active Members
While it is true the non-profit’s directors and active members are generally not liable for the organization’s debts, there are exceptions. For example, if a director personally guaranteed a business debt, he could be held liable for that debt. If a director or member intentionally injured or defrauded someone, they could be liable. Care must also be taken to properly file tax returns, pay any applicable taxes, and prevent co-mingling of funds in order to avoid personal liability.
A non-profit organization can be a perfect vehicle for charitable entities and others to conduct business. The advantages of limited personal liability and tax-exempt status are key. However, care must be taken to maintain non-profit status. Actions such as the distribution of profits to the organization’s members or failure to maintain tax and corporate records can endanger the organization’s non-profit status.