What is a Non Profit Corporation and How to Set it Up
The major difference between a for-profit and a nonprofit business is that a nonprofit business is set up to provide some benefit to the public at large and not really created for person profiting. In a non-profit business, the income that is left over after the Corporation has paid off its bills and dues, is put back into the business.
A venture as a nonprofit corporation may be eligible for certain benefits such as sales, property and income tax exemption at the state level. It should be clearly understood that while most of the federal tax exempt organizations are nonprofit organizations, organizing as a nonprofit business at state level does not automatically grant you an exemption from the federal income tax.
A nonprofit business can receive contributions that are deductible to the individual who contributes to the organization.
Nonprofit businesses are incorporated under the laws of the state in which they conduct their business. To receive federal tax exempt status the organization must apply with the Internal Revenue Service. First of all you must have an Employment Identification Number, EIN and then apply for recognition of exemption by filing form 1023 (Application for Recognition of Exemption under Section 501(c)(3) of The Internal Revenue Code), or 1024 (Other Tax Exempt Organisations), with the required fee. Both forms are available online at www.irs.gov.
The IRS identifies different types of nonprofit organizations by the tax code under which they are allowed to function in different fees such as education, scientific, religious and literally work. This can include education centers, clinics and hospitals.
The nonprofit organizations and businesses have to follow a certain guidelines and set of rules in order to maintain their tax exempt status. For example, a section 501(C)(3) organization cannot intervene in political campaigns.
A nonprofit organization may still have to pay employment taxes but in some states they may be exempt from paying sales tax. You will need to check the rules in your state with your secretary of state in order to understand how nonprofit status is treated in your area. A nonprofit Corporation may be liable for unrelated business income tax which is not related to the charitable purpose.
If your nonprofit corporation has revenues of more than $25,000 a year, be sure to file an annual report in the form of form 990 with the IRS. Form 990–EZ is a shortened version of 990 and is meant for use by small exempt organizations with total assets at the end of each year of less than $25,000.
In form 990 you will provide information on the organization’s income, expenses and staff salaries.
The IRS report also has to be made available for public review. If you use the calendar year as accounting, you should file the form 909 by 15 May every year.
For more information on ISS tax exempt status download IRS publications 557 at www.IRS.GOV.