Whether you just started a nonprofit or are working with a few others to get one started, you may have considered incorporating. It requires some paperwork and can be a bit complicated, but for many nonprofits, it is well worth the effort. If you are unsure whether incorporating is best for your nonprofit, here are five instances when it is advisable to incorporate a nonprofit organization.
1. Nonprofits should be incorporated if profit is made from its activities
There are many cases in which a nonprofit makes a profit from stated activities. If your organization is going to make a profit, or you expect it to, then the organization could benefit from being incorporated. As long as the profit is related to the activities of the charitable entity, you will not be required to pay income tax on a state or federal level.
2. Incorporate an organization if you will solicit tax-deductible contributions or donations
When an organization is incorporated as a nonprofit corporation and has tax-exempt status, then those who donate to the corporation can claim them on state and federal tax returns. Many times, organizations will donate more freely when they can receive a tax deduction for them.
3. Increase the likelihood of obtaining grant money by incorporating
Many grants, both public and private, may be unobtainable if a nonprofit is not incorporated. It is usually easier to gain a tax-exempt status once you are incorporated. Applying for tax exemption as a nonprofit is possible if you are not a corporation, however, it is usually easier to obtain tax-exempt status from the IRS as a corporation rather than an organization.
4. Limit personal liability by incorporating a nonprofit
Incorporating can protect personal property such as cars, houses, and money in the event the organization finds itself facing a lawsuit. Legal action can be taken against a nonprofit, incorporating protects members and directors from personal liability. An unincorporated organization’s members or directors are not provided this level of personal protection.
5. Incorporation may provide protection if the organization enters a political arena
Typically, nonprofits are not engaged in political advocacy since there are very strict federal lobbying regulations. However, if a group does venture into the political arena, advocating could lead to lawsuits. If the organization is sued and loses the legal battle, personal assets are protected even if the nonprofit can’t pay the monetary award.
Other Side Benefits of Incorporating Nonprofits
There are a couple of additional benefits nonprofit corporations may enjoy, although they are not factors when deciding whether to incorporate. Nonprofits may be able to obtain:
· Mailing permits allowing them to enjoy special postal rates. This can reduce operating costs if the organization participates in solicitation via postal mail.
· Nonprofit corporations are often exempt from paying property taxes on real estate. Check with the county assessor’s office in the county where the nonprofit is located. They can provide more information on what is called “welfare exemption.”
To learn more about additional benefits for nonprofit organizations, tax exemptions, bylaws and other business services, please contact our office today to schedule an appointment. James Provenza is the leading estate and nonprofit attorney in Glenview, Illinois.