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Thinking about Starting a Non-Profit Organization?

Congratulations on your desire to be of service! Now that you have your vision of what you want to do, it’s time to start thinking about how you want to do it.

One of the first decisions you’ll need to make is do you need to incorporate? And if so, will you organize as a for-profit corporation or non-profit corporation?

One of the primary differences between a non-profit and profit corporation is how they raise money.  In a profit company, money is raised through sale of stock or investors.  In a non-profit, the corporation accepts tax-exempt donations or grants.  Investors receive a tax write-off up-front, but are not paid dividends like investors in a for-profit corporation.

For some organizations, even those with a social mission, a for-profit corporate structure is the way to go.   Here is an example of a profit corporation with a social mission.

There are some pros and cons of becoming of non-profit so think it through…

  • While reasonable salaries and employment benefits may be paid to employees, payment of profit or other benefits to directors, officers and staff are prohibited.
  • Income generated from activities not related to the tax-exempt purposes of the organization must not be substantial
  • Assets are dedicated to the tax-exempt purposes of the organization.  If the organization dissolves, assets are required to be distributed to another tax-exempt organization.
  • Non-profit corporations are heavily monitored by the IRS to avoid abuse of the system
  • Set up of a non-profit corporation, while certainly achievable is a more complex process than the creation of a profit organization
  • If your organization operates effectively as an informal organization with the need for tax deductible contributions or limited liability, then it may be best not to incorporate – either as a nor-profit or a non-profit

Some advantages of forming a non-profit corporation include

  • Organizations with the 501(c)(3) designation are eligible for state and federal tax exemption, which can be up to 34% of the corporation’s taxable income!
  • Your organization will be eligible to receive grants from both public and private organizations and foundations
  • Limited liability – Directors and officers and employees of a non-profit organization are not personally liable financial debt or lawsuit judgments

There are many other advantages to forming a non-profit organization.  While the paperwork, start-up costs and time and energy can be intimidating, the Non-Profit Toolbox is here to help walk you through the process!

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