Why Should You Form a Nonprofit?

Why Should You Form a Nonprofit?

You have a great idea that you believe will positively impact folks in your community or even nationally. Perhaps it’s to offer free school supplies to qualified recipients. Or maybe you want to start a neighborhood food bank.

What’s one of the first steps you should take?

Call us biased since it’s in our name, but here at .NGO, we suggest creating, well, an NGO (a non-governmental organization, also known as a “nonprofit”).

What is a Nonprofit?

Generally, a nonprofit is a business entity whose proceeds are not distributed to the owners, as would be the case in a regular corporation. Instead, proceeds stay within the nonprofit and are used to further its mission and fund its efforts. Note then that not all nonprofits have to exist to serve the public in the way, for example, that a food bank or the American Red Cross does. Major universities and schools (and at one time even the NFL) could be nonprofits. But for this post, we’re referring to nonprofits that serve charitable purposes.

We won’t delve into creating a nonprofit in this article. Instead, know that depending on the state where you will incorporate, your nonprofit could exist to serve “any lawful purpose,” or your state may ask you to narrow your focus to a charitable purpose. Your nonprofit’s purpose will come under scrutiny when you apply for 501(c)3 designation, and your state may deny state-tax exemption if you aren’t serving a charitable purpose.

The Benefits of a Nonprofit

Regarding taxes, let’s discuss some of the benefits of creating a nonprofit instead of carrying on your activities without incorporating (filing with your state to create your business entity) or even undertaking your activities with a for-profit corporate structure.

First, like most corporate structures, nonprofit directors, employees, and officers are not personally liable for any debt or liabilities incurred by the nonprofit. This means your personal assets are shielded from anyone who may have a claim against the nonprofit.

Second, and back to taxes, nonprofits may enjoy state-tax exemption on certain purchases. And, if the nonprofit receives 501(c)3 designation, it will enjoy nationwide tax exemption on certain purchases. If it qualified, a nonprofit might also be exempt from state income tax, and, if it receives 501(c)3 designation, federal corporate income tax. Also, donations to 501(c)3 nonprofits are tax-deductible, a boon for donors.

Third, depending on your nonprofit’s purpose, you may qualify for public and private grants to help fuel your activities and bolster your efforts. Many grant providers, including government agencies, limit their offerings to nonprofits only.

Fourth, being a nonprofit also has reputational benefits, as it shows you’re serious about what you’re trying to accomplish and that you’re not in it for personal gain.

But Wait!

Now, are there any drawbacks? Of course. But nothing, we believe, to be too consequential as to dissuade anyone from starting their own nonprofit.

First, there’s a cost to incorporating as a nonprofit, and the process itself can be somewhat tedious (we discuss that here).

Second, nonprofits are expected to have detailed paperwork to promote transparency. Your books may be subject to inspection by the government and your donors, and if you miss tax or other reporting deadlines, you risk losing exempt statutes you may have attained (for example, exemption from state-level taxes).

Third, an incorporated nonprofit is a business. That means you’ll need to have founding documents (including Bylaws, which we discuss here) and a board of directors (though, in many states, the board can consist of one person only). The board will make critical decisions, so if you’re the founder of the nonprofit, you may encounter some healthy disagreements on occasion.

Cue .NGO

The good news is that we can help with at least two of the drawbacks. With .NGO, you can start accepting tax-deductible donations in minutes through our partner’s fiscal sponsorship program. That means you eliminate the cost of applying for a 501(c)3, eliminate having to traverse through those bureaucratic hurdles, and instead, accept donations that are tax-deductible for your donors.

Learn more at: www.dot.ngo/

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