The decision to incorporate is an important one. Not all nonprofit organizations decide to become a corporation. There are many reasons why a nonprofit organization would choose to incorporate, and some situations where organizational leaders may not feel that it’s worth the investment. In this article, learn more about the reasons why nonprofits should incorporate.
Common Reasons to Incorporate a Nonprofit Organization
There are many reasons why a nonprofit should consider incorporating. Some of the most common reasons outlined by existing organizations asked “why should a non-profit incorporate” are:
Increasing Legitimacy and Credibility
Corporations are often seen as more credible and legitimate than clubs or associations. Incorporating means that your organization will show up when someone searches state records and will have to complete certain activities to remain compliant with your state and local laws for record-keeping and meeting minutes. This could make a difference for donors, lenders, and other community members.
Generating a Profit
For non-profit organizations that will generate revenue in the future, incorporating can provide some benefits when it comes to tax time. Even if your organization has a non-profit and tax-exempt status, it will still need to pay taxes on any income generated that is not related to its charitable activities or mission statement. Having it set up as a corporation with separate financial accounts and organized records can be extremely helpful during tax time, as all of the information needed will already be available.
Applying for Tax-Exempt Status
To apply for public and private grants, non-profits often need to have a tax-exempt status. While it is possible to get tax exemption without incorporating, it is easier for incorporated non-profits to become tax-exempt. In terms of grants, some grant-giving agencies may prefer to give funds to incorporated non-profits, as the process of incorporating lends credibility and suggests long-term commitment.
Collect Tax-Deductible Donations
For organizations that collect tax-deductible donations, tax-exempt status is important to be able to give donors a donation receipt to use for their tax purposes. People looking to make more sizable donations will look for legitimate non-profit organizations with this ability to give donation receipts. Incorporating can make all of these processes easier.
Reduce Liability from Lawsuits
Non-profit organizations, in many ways, are businesses. Depending on how the business is structured, the founders or leaders could have personal liability if someone wants to sue the organization. Incorporation is one way to reduce individual liability from the organization. In the legal system, the organization will be considered a separate entity.
Engaging in Political Advocacy
There are some ramifications that non-profit organizations should remain aware of when it comes to engaging in political advocacy or lobbying. One of these concerns is with legal action that could involve the members’ or leaders’ personal assets. Incorporating the non-profit can put some distance between individuals and the organization itself. Whether the organization or individual members participate in political advocacy, there is some level of protection that incorporation offers.
Saving on Property Tax
Non-profit corporations are exempt from property taxes. If your non-profit owns or plans to own property, this could amount to some significant savings for the organization. While not all non-profits operate physical locations, many do. Combined with getting tax-exempt, this could leave more money within the organization to use for its mission.
Incorporation vs. Tax Exemption
Incorporating a non-profit organization is different than applying for a tax exemption from the IRS or state government. Often, incorporation is the first step to securing tax-exempt status. However, there are some instances where an unincorporated non-profit or charity may receive the tax exemption. If you have any questions about how this impacts your organization, discuss your concerns with a local non-profit lawyer to best understand the implications of this important decision.
When to Incorporate a Non-Profit
If your non-profit organization is still more a concept than an idea, it probably isn’t time to incorporate just yet. Becoming a corporation requires certain tasks to be completed. It isn’t necessary right at the beginning when it’s still an idea. However, it is time to incorporate a non-profit when it plans on applying for tax-exempt status or for grants, opening a bank account, and accepting charitable donations.
Contact a Chicago Non-Profit Lawyer to Incorporate
Incorporating your non-profit organization is a big decision. Working with a Chicago non-profit lawyer can help to make the process go smoother because your lawyer has experience helping other organizations. Contact James C. Provenza & Associates, P.C. at (847) 729-3939 or by filling out our online form.