Everything You Need to Know about Incorporating a Non-Profit Organization

If social welfare is your dream and you want to contribute to the society on a larger scale, then incorporating a non-profit organization such as charity, club and association is your best bet. It will provide you with a platform to perform constructive activities for the betterment of the society while enhancing your entrepreneurial skills. Also, there are a number of benefits that you can enjoy when starting a non-profit organization compared to a for-profit organization. It includes tax advantages, legal protection and other exemptions.

There are several things you must know you start a non-profit organization. The pros and cons of this type of business structure, and the steps of incorporation are some of the crucial details. In this blog post, we have shed light on everything you need to know about incorporating a non-profit organization to help you work for a noble cause in an easy way.

Meaning of a Non-Profit Organization

A non-profit organization (NPO) is dedicated to uplifting the society and it is formed for the purpose of serving a public or mutual benefit rather than earning a profit. In fact, the surplus of the revenue generated by the organization is used to further achieve its mission and support the operation of the organization, rather than distributing it among the members or shareholders. Some of the important characteristics of a non-profit organization are-

• Organized
• Separate from the government (private)
• Voluntary
• Non-profit distributing
• Self-governing

The Internal Revenue Service (IRS) has granted tax-exempt status to this type of business structure. Unlike for-profit organizations that sell their good and services to earn money, NPOs receive donations and earn money through fundraising activities. Also, public confidence is an important factor that determines the amount of money raised by the organization. The more public confidence an NPO has, the more money it will be able to raise.

Steps to Incorporate a Non-Profit Organization

 

1) Do Proper Planning and Research

The most important step before you start a non-profit business is to have a clear objective in your mind. Decide what is your aim and objective, who are you trying to reach with the help of this organization and whether you have sufficient resources or not. Once you have decided the above-mentioned points, start with proper planning and research. Most NPOs fail to achieve their objective in the initial phase because they don’t put enough time into doing their homework. Research well to find out whether your non-profit will fill an unmet need in the society or your community. Be sure if there are other organizations working toward the same cause. Assess what sort of people will support your organization as it will help in finding members and supporters.

2) Choose a Business Name and Appoint Board of Directors

Creating a unique identity is necessary for your NPO so that people can recognize it. For that, you need to have a business name. Choose a business name that suits the cause you’re supporting and don’t forget to register it and file for an Employer Identification Number (EIN). Also, choose the initial Board of Directors who are reliable and committed towards the objective of the association.

3) Fulfil the State Legal Requirements

Incorporating a non-profit organization is similar to incorporating any other type of business. So, you have to meet the state legal requirements and complete all paperwork. The list of documents required for incorporating an NPO includes:

• Articles of Incorporation (Form 4001) which must be completed and signed
• Initial registered office of the organization and the first Board of Directors (Form 4002)
• NUANS name search report where the research has been done within the last 90 days (not required if the proposed name of the NPO is entirely in numerals)
• Filing fee
• Filled in online application form

4) Call for First Director’s Meeting

After taking the initial steps of incorporation, call for the first organization meeting of the directors. The purpose of the meeting is to organize the corporation and adopting several resolutions to conduct its activities. To learn more about the meeting and the rules to be followed, click here.

5) Create By-Laws

An organization without rules for governance and operations is not sustainable. That’s why the next step should be to make by-laws for your NPO. They are both a legal document and a roadmap for your organization’s actions. By-laws are necessary to form an agreement between the NPO and its members to conduct itself in a particular way. However, they can be amended from time to time.

6) Register as a Charity with the CRA

To get an exemption from tax under the Income Tax Act, a corporation created and operated for charity must register with the Canada Revenue Agency (CRA). To apply for charitable registration, send complete Form T2050 and Application to Register a charity Under the Income Tax Act to the following address:

Charities Directorate
Canada Revenue Agency
Ottawa ON K1A 0L5

To know about the detailed application procedure, click here.

7) File for Federal Tax-Exemption Status

After you have completed all your paperwork for incorporation and registered with the CRA, you should submit your application to the IRS for your federal non-profit status. In the absence of this status, you won’t be able to fundraise for a charitable purpose. File Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Once you obtain your federal 501(c)(3) tax-exempt status by the IRS, file for the state tax-exempt status as well. Some states will automatically grant you the status after receiving the federal exemption, but for others, you need to send a copy of the IRS determination letter to get the state exemption.

Pros and Cons of Starting a Non-Profit Organization

If you are wondering whether starting a non-profit is worthwhile or not, then have a look at the advantages and disadvantages of NPO incorporation. It will help you understand what to expect from this type of business structure.

Advantages

• You get state and federal exemptions from corporate income taxes along with certain other taxes like local taxes from state and county. So, all the earnings can be cycled back into the organization for its mission.
• The donations received by the organization by individuals and corporations are tax-deductible, thus people are encouraged to donate and claim tax benefits in return.
• Your personal assets are safe as employees or members of NPOs are not personally liable for the debts of the organization. It has a separate legal entity. Even if someone sues your corporation, no one can go after your personal assets to pay off business-related debt.
• Incorporating an NPO is the best way to create a team of mission-driver individuals who want to uplift the society by expanding their efforts and making a bigger impact.
• Apart from donations from other corporations, individuals and fund-raising activities, NPOs are eligible to receive additional grants from the government as well.

Disadvantages

• The process of incorporation is time-consuming and expensive. It can take months for the preparation and the cost of submitting various applications is high. Also, you may need to hire a consultant or lawyer to help you with documentation and filing.
• The salary received by the employees are subject to income tax like any other type of compensation.
• No members or shareholders can receive profits made from the non-profit organization. It can create difficulty in the future to generate interest from potential investors.
• At the time of closing the organization, the assets of the NPO will be given to another non-profit.
• There is high competition in receiving funding as there are several non-profits in the country. So, the members need to struggle consistently to get funds. That’s why many organizations hire professional grant writers.
• Finding individuals to work for a social cause with no profit in a limited budget is difficult. As a result, attracting volunteers becomes challenging.

Incorporating a non-profit organization is an excellent opportunity for people who want to make the world a better place and work for the improvement of the society on a larger scale. But, there are a number of legal obligations you need to take care of when starting the organization. Also, several perks and drawbacks are involved. So, make sure that you go through all the important details before starting an NPO.

Hopefully, this guide has helped you understand everything about NPO incorporation. To learn more about an organization or to get help in handling bookkeeping of a non-profit, contact remote bookkeepers of Virtuous.