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Post written by Laura Verson, an attorney serving nonprofits in California.
Are you considering forming a nonprofit corporation? Maybe you just came up with an idea to change the world, or perhaps you’ve been saving the world for years and want a formal structure for your work. A nonprofit corporation may be a great fit for what you want to accomplish, but there are several important considerations to think through before taking the next step.
First, you should understand what a nonprofit corporation is (and isn’t). A nonprofit corporation (sometimes referred to informally as a charity) is a type of legal entity that is organized and operated for some kind of public good. This is in contrast to a traditional business whose general aim is to provide a profit to its owners. Nonprofits, on the other hand, must put any money that is left after expenses back into the organization, instead of giving it to individual owners. In other words, if you’re looking to start a nonprofit to maximize your own profits, then you’re probably going down the wrong path. However, if your goal is to promote a social cause, then a nonprofit might be a good fit for you.
Starting a nonprofit has many benefits, but there is one main reason to structure your organization this way: taxes. Nonprofits can get state and federal exemptions from paying corporate income tax (and other certain taxes). This means your nonprofit does not have to pay tax on the money that it brings in (like a traditional business would need to do). Tax-exempt status can also help you raise money for your organization. Certain individual donors can receive tax deductions when they make donations to your nonprofit, which can be a big draw when you are fundraising. However, nonprofits have to formally qualify with the federal government and the state in which they operate to receive these tax benefits.
To begin with, it takes time and money to start and run your nonprofit. There are extensive applications and forms required to receive your formal nonprofit incorporation and fees to pay as part of this process. To ensure that everything is done correctly, you’ll want to hire an attorney and an accountant, which adds to the cost. In addition to the start-up costs, most states require annual fees to retain your nonprofit status. You’ll also be subject to ongoing compliance requirements, like keeping detailed records and holding an annual board of directors meeting, to maintain your tax-exempt status.
There are several things to think through as you’re deciding if you want to form a nonprofit. You’ll want to have a good idea of what your organization will look like, and one good exercise to accomplish this is to go through the five W’s of journalism: who, what, where, when, and why.
If you’re struggling to answer these questions, you probably aren’t ready to start your nonprofit yet. But if you can answer these questions, then you’ve already done some of the work you’ll need to do as part of your nonprofit application!
If you’re not sure that a nonprofit is right for you, there are several alternatives available. A traditional for-profit business might better accomplish your goals. If you want a for-profit business but still want to do good, you can consider a certified B-corporation, which is a new hybrid business that balances profit with purpose. They are legally required to meet standards of social and environmental performance, public transparency, and legal accountability.
If you like the idea of a nonprofit, but don’t feel ready to go out on your own yet, you could consider a fiscal agent or fiscal sponsor. These relationships allow you to house a charitable project within an existing nonprofit with the ability to spin off your project as its own nonprofit at a later date. You could also consider working as an employee or volunteer at an existing nonprofit that does work similar to what you want to accomplish. This will give you invaluable experience in the nonprofit world and will help you decide if starting your own organization is something you want to do.
Starting a nonprofit can be a very exciting and fulfilling undertaking. However, it’s not something to jump into lightly, so you’ll want to think through this decision carefully.
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