Nonprofit Organizations 101

What is a Nonprofit? How do I Start One?

IRS Form 1040 Tax Credits
Influx Productions

Names for This Type of Business Structure: Not-for-Profit Organization, Non Profit, Non-Profit. The industry preferred term is used as one word, “Nonprofit.”

What is a Nonprofit Organization?

The term “nonprofit” simply refers to “not being commercial motivated.” Nonprofit organizations can, do, and should make profits. It is where profits come from, how much is made, and what is done with profits, that helps establish if the organization is “nonprofit” or a for-profit corporation.

There are three basic types of nonprofit organizations:

Information Nonprofit Organizations

You can form an “informal” nonprofit, simply by getting together with other people to provide support or services to benefit others. There are no special benefits in being an informal nonprofit, other than personal satisfaction in helping others, but there may be certain legal liabilities.

Be sure to check with an attorney before starting an informal nonprofit to discuss possible legal liability risks. If you plan to deduct expenses, receive donations, or charge any fees, you also need to talk with a tax accounting professional.

Informal nonprofit organizations are not, and cannot be, tax-exempt organizations.

Incorporated Nonprofit Organizations

This type of nonprofit is formed by incorporating in a particular state to form and be recognized as corporation.

A corporation takes the place of individual ownership. The corporation “owns” itself, and therefore, can own its own property, have its own bank account, take out its own loan, and can continue on its own eve if the founder leaves the organization.

One of the major benefits of incorporation is that the corporation takes on legal liability and financial risks so that founders, officers, and board members have little or no liability (with the exception illegal acts, or gross fiscal misconduct).

Nonprofit corporations can be classified in many ways, including as a public benefits corporation, public charity, or educational foundation.

Nonprofit corporations may be formed to benefit members of an organization (a club, or mutual benefit society) or for some public purpose (such as a disaster relief, social assistance programs, or youth development programs).

A nonprofit organization is not automatically tax exempt.

Tax-Exempt Organizations

Nonprofit corporations must file with the IRS as a separate step in order to receive tax exempt status. An organization cannot receive tax exemption unless it has first formed as a corporation with an accepted charitable structure and purpose.

Not all nonprofit organizations are eligible for tax exempt status. Only those that meet certain requirements, as defined by the IRS, will receive exempt status. You will need to complete an IRS Form 1023 to apply. The form is long, the process is expensive, and it can take up to one year to receive a decision.

Tax-exempt corporations are required to operate their business in certain ways, file a Form 990, and meet other IRS requirements, or risk losing their exemption status.

p]Most states accept an IRS ruling of tax exempt status, but a few states do not.

For example, California does not accept an IRS ruling as being a determination as also being exempt from California state taxes. To be exempt from California state taxation, you must file a an application with the state, and receive (and maintain) specific exemption status from state taxes.

How Do You Incorporate as a Nonprofit?

Just as with forming a for-profit business, you need to do a feasibility study, write a business plan, and prepare a mission statement. In addition to the standard requirements involved in starting any business, to form a nonprofit you need to:

  • Get an Employer Identification Number (EIN): This substitutes as a social security number for the corporation. You can apply for an EIN online through the Internal Revenue Service (IRS) website.
  • Form a Board of Directors: All incorporated nonprofit organizations must have a board of directors.File Your Founding Documents: These include Articles of Incorporation and Bylaws. You need to file these documents in the state in which you want to register your corporation. In most states, you do not have to file a fictitious name statement when incorporating a business.


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