Nonprofits operate for the betterment of the community, but do you know the risks? Nonprofits come with a set of rules for running and maintaining them legally. That brings up an important question about whether to incorporate a nonprofit.
Unincorporated Nonprofit Earnings
You have probably already heard that nonprofits can come with tax benefits. That’s true but only within certain parameters. First, the nonprofit must gains its funds in alignment with its stated purpose. Second, it cannot earn more than $5000 in one year. What happens if you earn more than $5000? The answer is that an unincorporated nonprofit has to start paying taxes on that money.
Earnings of an Incorporated Nonprofit
By incorporating your nonprofit, you lift the $5000 ceiling on taxes exemption. Those organizations expecting or hoping to earn over that amount may want to consider incorporation. The cost of incorporation is very low compared to most business-building expenses.
Donations and Contributions to Incorporated Nonprofits
Part of raising money for nonprofits may include donations or contributions. While you may draw in such monies while unincorporated, it’s much easier to do so as an incorporated nonprofit. With incorporation, you have established your organization as an official entity. That gives donors a greater sense of security. Even organizations of only two or three people can inspire this trust when incorporated. Secondly, and most importantly, monies given to an incorporated nonprofit are tax deductible for the donors and contributors.
Grants to Incorporated Nonprofits
Grants to unincorporated nonprofits don’t happen that often. A best practice for those offering grants is to require incorporation of the recipient. Incorporation comes with legal benefits and tax exemptions. Grantspace.org reports that incorporation also adds clout. Those who offer grants already know that and they want to put their eggs in the best baskets. Incorporation signals an intent and legality they find attractive.
Legal Benefits of Incorporating your Nonprofit
Limitation of Liability through Incorporation
When you incorporate your nonprofit, you create a new legal entity. That entity may have you as one of its parts, but it is not you, at least from a legal standpoint. That means that if your nonprofit gets sued, your personal assets are not on the table. Incorporation shields corporation members from many legal actions. That is, of course, a bit of a generalization. To know all of the protections and some of the weaknesses, a talk with a legal expert may be in order. How you run your nonprofit and what your goals are matters a great deal. If your stated purpose cuts across the income lines of some other organization, you might get sued. You will want your legal ducks in a row before you start.
Nonprofits and the Privilege to Lobby
One way to get into legal problems is with lobbying. You must first have the proper paperwork in order before you lobby via your nonprofit. Despite some appearances, the IRS does not want you to lose your status and posts guidelines explaining how to maintain it. Secondly, you need to know your limitations. If your nonprofit organization dedicates too much of its efforts toward lobbying, you might lose your status.
Cautions When Starting your Nonprofit
However, regarding lobbying, incorporation is worth it for another reason. You may run into opposition from those with different political viewpoints. That could lead to lawsuits making the legal protections via incorporation a prudent idea.
What is a Nonprofit?
Be aware that the government considers you a nonprofit organization even if you are just two people collecting money to help others in your community. So long as you earn less than $5000, that should cause no problems. You should know how to file your returns for that money, however.
Don’t Jump the Gun When Collecting Nonprofit Income
You want to make sure you have applied for and received your paperwork back from the IRS before you start fundraising. The Balance cautions that you wait for the official Letter of Determination. Until you are officially declared a nonprofit, those monies may be taxable. It pays to wait for acknowledgement from the IRS.
Check State Regulations on Nonprofits
Each U.S. state regulates nonprofits differently. Furthermore, you can’t simply apply in one state and then fundraise across the country. You must check with each state and register separately when necessary.
Should You Incorporate Your Nonproft?
Should you incorporate your nonprofit? The answer is most often yes. The expectations of your organization activities should tell you whether or not it is the right choice for you. If you want to create room for your nonprofit to grow without limitations, incorporation may be the wisest choice. When it comes time to file your returns at the end of each fiscal year, you may be glad you did.