Written by Sagan L. Carman-Downer
When forming a non-profit organization, one of the first things you will need to decide is what type of entity you will use to operate the organization. An organization is not necessarily required to establish a formal non-profit corporation under state law. Additionally, there is no requirement that a non-profit that is formally organized under state law apply for status as a tax-exempt organization for purposes of federal income tax.
Thus, there are three options you can consider when deciding how to operate your non-profit organization.
1. Form a non-profit corporation under state law and apply for federal income tax exemption.
2. Form a non-profit corporation under state law and forego federal income tax exemption.
3. Forego formal incorporation under state law and forego federal income tax exemption.
If you choose to form a non-profit corporation under state law, commonly known as incorporating your organization, you will need to look at state law to see what is required. Incorporating will involve filing a document known as the Articles of Incorporation. State law will provide guidance on what information is required in the Articles. Typically, the Articles will indicate the purpose of the organization, the address where it is located, and who is incorporating it. The Articles may, and commonly do, include additional information regarding how the organization will be managed. Once you have filed the Articles, and the state has accepted that document, you will have become a non-profit corporation.
At this point, you can either operate at a non-profit corporation that is subject to federal income tax, or you can seek tax-exempt status. To qualify as a corporation that is exempt from paying federal income tax, you will file an application with the Internal Revenue Service. In order to qualify, you will need to meet specific requirements provided by the IRS. The application will examine, among other things, the purpose for which the corporation is formed and the restrictions on how its revenue is generated and used. If the corporation meets the requirements, it will be determined to be a tax-exempt organization. If the corporation fails to meet the requirements, it will still be subject to federal income tax.
Another option is to forego incorporation under state law and federal income tax exemption, and simply operate as an unincorporated association. If the organization chooses this option, there may be tax and liability ramifications. That is not to say, though, that this option is never appropriate under certain circumstances. Depending on the facts of your situation, this option may be adequate, and would save the organization the time and money involved in incorporating and seeking tax-exempt status.
In order to decide which of these three option will work best for your non-profit organization, it is best to speak with an attorney in your state. An attorney can look at the facts of your specific situation, and advise you of the pros and cons of each of the options provided.