Cheat Sheet: Non Profit Companies
Tuesday/August/19 23:56 Filed in:
Non profitWhat is a Non-Profit Corporation?
A Nonprofit corporation has no shareholders and cannot pay dividends. Instead of stockholders, the nonprofit has “members”, who generally pay dues for membership. Essentially, the shareholder of a nonprofit company is the “public good”. Under IRS Code 501 (c)(3) a nonprofit corporation may be formed to operate for some religious, charitable, educational, literary, or scientific purpose. What is a Non-Profit Corporation?
A Nonprofit corporation has no shareholders and cannot pay dividends. Instead of stockholders, the nonprofit has “members”, who generally pay dues for membership. Essentially, the shareholder of a nonprofit company is the “public good”. Under IRS Code 501 (c)(3) a nonprofit corporation may be formed to operate for some religious, charitable, educational, literary, or scientific purpose. All tax exempt companies that obtains 501(c)(3) status are described as “private foundations” under IRS regulation. Upon dissolution, a nonprofit must distribute its remaining assets to another qualified nonprofit group.
Advantages of a Nonprofit Corporation
Tax Exemptions: Under internal revenue Code Section 501 (c) (3) a non-profit corporation is eligible for certain federal and State tax exemptions. With income tax rates as high as 34% on income over $75,000, tax exemption status can be invaluable.
Receiving Public Funds: Many organizations are required by law to donate a certain percentage of their funds to non-profit organizations or possible endanger their own tax-exempt status. In addition, many exemptions exist for property transferred at death to a non-profit organization
Limited Liability for Members and Directors: As with a General, for-profit corporation, directors, trustees, and officers of non-profit corporations are usually afforded the same limited liability status. Thus, creditors of the nonprofit corporation can only reach as far as the corporation's assets to satisfy corporate debts and not the personal assets of the people involved in the nonprofit corporation.
Separate and Perpetual Existence: A nonprofit corporation, like a for-profit corporation, is an entity with a perpetual existence that may outlive all of its founders. in addition, the corporation can act like an individual in that it can enter contracts, incur debt, and own property.
Employee Benefits: The principle of a nonprofit corporation can be employed by the corporation. As such, these employees can be eligible for fringe benefits not available to self-employed people. Examples of these benefits include, sick pay, group life insurance, accident and health insurance, and corporate pension plans.
Other Advantages
• nonprofit corporations under 501 (c) (3) receive lower postal rates on bulk mail
• many organizations offer discounted advertising rates to nonprofit entities
• many internet service providers offer discounted rates to nonprofit corporations
• many national chains (Costco, for example) offer lower membership rates
• nonprofit corporate employees may qualify for job-training and other work-study programs subsidized by the federal government
Disadvantages of a Nonprofit Corporation
Paperwork: Articles of Incorporation must be prepared and filed with the appropriate state entity. The specific language in the Articles must contain provisions required by the IRS for acceptance as a tax-exempt entity. This language varies depending upon the specific type of non-profit company being used. In addition, Bylaws must be prepared, minutes must be maintained, and certain federal and state tax exemption filings must be timely filed to attain a tax-exempt status.
Federal & State Tax Filings: On the Federal level, IRS form 1023 must be completed within 15 months of the date the Articles of incorporation are filed, in order to qualify for 503 (c) (3) Federal tax Exempt status. Although certain groups are NOT required to file Form 1023, it is recommended that these exempt organizations nonetheless submit the filing to ensure that the IRS view the organization as a tax exempt entity. Only after a corporation is approved by the IRS as a Tax Exempt Organization can it be assured that it is in fact a recognized tax-exempt company.
Costs: State filing fees for non profit companies are generally minimal. However, there are additional fees associated with obtaining Exempt Organization (EO) Letter Rulings. Effective February 1, 2006, EO letter ruling fees which previously ranged from $155 to $2,570 will increase to $275 to $8,700.
Most States Require 3 Directors: However, LA, MA, MN and VA allow less than three directors if there are less than three members. States requiring only 1 director include: CA, CO, DE, IA, KS, MI, MS, NH, OK, OR, PA, SC, VA, WA, WV.
Participation in Political Campaigns: Tax exempt organizations are prohibited from participating in political campaigns for or against persons running for public office. “Substantial engagement” in legislative political activities are also forbidden.
Restrictions of Self Dealing: Private foundations are subject to restrictions of self-dealing between the entity and their substantial contributors and other disqualified persons. These transactions include:
1. Sales of exchanges of property
2. Leases
3. Loans
4. Providing goods, services or facilities
5. Paying compensation
6. Use of income or assets
7. Payment to Government Officials
Income Distributions Requirements: A private foundation must annually distribute income for its charitable purposes.
Limitations on Holding Private Businesses. A private foundation must limit its holdings in a private business to a total of 20% of the voting stock in a business – which includes any stock owned by any of its disqualified persons.
FORMS and RECOMMENDED PUBLICATIONS
Tags: 501(c)(3), religious organization, charitable organization, educational organization, private foundation