What are the differences
between for profit and nonprofit corporations?
Profit corporations are authorized to issue
shares of stock to shareholders in return for capital investments.
Shareholders receive a return on their investments when dividends
are paid or when assets are distributed after dissolution.
Nonprofit corporations neither issue shares nor pay dividends,
no part of the income may be distributed to its members, directors,
or officers.
What are the differences between tax-exempt
and nonprofit corporations?
Nonprofit does not mean tax-exempt. A “tax-exempt
organization” is a unique entity that is usually a nonprofit
organization. However, a nonprofit organization cannot be
exempt from Federal and State income or franchise tax until
the organization applies for an exemption and the IRS and
the state franchise board issues a determination of exemption.
Why form a tax-exempt
nonprofit corporation?
Being organized as a tax-exempt corporation
is a common requirement for obtaining grant funds from government
agencies and private foundations. Generally, tax-exempt government
foundations as well as private foundations and charities are
required by their own operating rules and by IRS regulations
to donate their funds only to 501(c)(3) tax-exempt organizations
or else forfeit their own tax-exempt status.
Additionally, only tax-exempt nonprofit
corporations provide donors with the incentive of an individual
tax deduction on all donations given to your nonprofit. Additional
benefits include, low cost mailing, discounted advertisements,
and other private and governmental discounts.
Does my corporation
qualify as a tax-exempt nonprofit?
To qualify for exemption under the Internal
Revenue Code, your organization must be organized for one
or more of the purposes specifically designated in the Code.
For an organization to qualify under a 501(C)(3) exemption,
it must be organized for one or more of the following purposes:
Charitable
Religious
Educational
Scientific
Literary
Testing for public safety
Fostering national or international amateur sports competition
The prevention of cruelty to children or animals
Additional tax exemptions exist under separate sections of
the IRC for groups including: labor unions, chambers of commerce,
social and recreational clubs, fraternal societies, civic
leagues, credit unions, farmers’ coops and mutual insurance
companies, and legal service organizations. LegalFilings also
provides tax exempt filings for these types of organizations
listed above.
What are the
disadvantages of forming a tax-exempt nonprofit?
Your nonprofit income activities will be
in most part restricted to the stated purpose of your tax-exempt
basis. Income from sources unrelated to the purpose of the
organization will be taxable. If this unrelated income starts
to become a substantial portion of the income earned, this
could attract attention from the IRS and prompt a reconsideration
of the 501(c)(3) tax-exempt status.
Additionally, you will not be able to benefit
from the value of any assets of the nonprofit corporation.
All assets of the corporation must be dedicated to tax-exempt
purposes. Upon dissolution of the corporation, all assets
must be distributed to other 501(c)(3) corporations.
Furthermore, payments of dividends to shareholders
or payments of profits to directors, officers, members or
staff are prohibited, however reasonable salaries are allowed.
Can a nonprofit
corporation make a profit?
Yes. A nonprofit corporation can take in
more money than it spends. It can use the tax free profits
for its own operating expenses including salaries. What a
nonprofit corporation cannot do is distribute any profits
to officers, directors or employees.
Am I required
to file both federal and state exemptions?
Although most state tax exempt laws are
patterned after the Internal Revenue Code, obtaining state
exemption is a separate process from obtaining federal exemption.
Even if an organization has obtained federal exemption, it
must follow the procedures of the state franchise tax board
to obtain state tax exemption. In some states, it is possible
to obtain state tax exemption before securing federal exempt
status.
How long does
it take for the IRS to approve the application?
Our experience is the IRS review period
can vary considerably depending on such factors as the uniqueness
of the proposed exempt purpose and the workload of the IRS
in this area. The IRS usually issues the exemption recognition
ruling in approximately 2 to 6 months, however in most circumstances
the recognition of exempt status is retroactive to the date
of incorporation.
Is there more
than one category of tax-exempt organizations?
Yes. The Internal Revenue Code (IRC) Section
501(c)(3) public charity or private foundation is meant to
serve religious, educational, charitable, scientific and literary
organizations, among others. Organizations that are given
the status of IRC Section 501(c)(4)-(27) are tax-exempt, but
not charitable. They could be trade associations, social clubs,
etc.
If my nonprofit
is tax-exempt, do I pay any type of taxes?
If you’re a private foundation, you
will have to pay tax on your investment earnings and the minimum
undistributed grant allocations, and “unrelated business
income.” You will also have to pay federal and state
employment taxes, and sales and/or property taxes.
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