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Nonprofit status is the only real option for any organization seeking to benefit the public. Allowing for tax-exempt status, nonprofit categorization ensures your entity can focus on what is important. Requirements and costs vary from state to state.

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Common questions

What is a nonprofit corporation?

Nonprofit corporations are organized under state law for a "public benefit," meaning for a purpose other than earning profits. They typically aim to benefit the public or specific public groups by providing charitable, educational, religious, literary, or scientific services. Nonprofit corporations range from small local charities to large nationwide companies, such as the Salvation Army or Big Brothers Big Sisters. Community foundations are also part of this group.

Section 501(c) of the income tax law provides for 29 types of organizations that are tax-exempt, with a 501(c)(3) nonprofit organization being the most common type. An important feature of nonprofits is that they do not pay federal or state income taxes if they qualify under section 501(c)(3) of the IRC and the corresponding state exemption. For instance, charities are exempt from taxes because they provide a benefit to the community. Surplus profits typically are invested into the nonprofit's mission. Some 501(c)(3) groups will provide donors with a tax deduction for their contribution. In order to reap these benefits, you must file the appropriate paperwork with the government.

What documents should a nonprofit maintain?

A nonprofit should have three key documents in order to operate: articles of incorporation, bylaws, and board minutes.

How does nonprofit taxation differ from other business entities?

Nonprofit corporations that obtain tax-exempt status with the IRS are exempt from paying federal income tax and may also have a number of other tax exemptions available at the state and local levels.

Are 501(c)(3) nonprofit corporations required to make their financial statements available to the public?

Yes, nonprofit corporations are required to make their financial statements available to the public. Form 990 includes a nonprofit’s figures for revenue, expenses, assets, and liabilities, and all 501(c)(3) nonprofits are required to submit Form 990 to the IRS annually. The form also includes the salaries of the directors, officers, and executives of the corporation.

Nonprofits are required to make this information available to the public during normal business hours, with the idea being that nonprofits are created to serve the public interest and therefore should remain transparent for accountability purposes. This information is also made available to the public by the IRS.

What are the IRS requirements when starting a nonprofit corporation?

The IRS does not require nonprofit corporations to apply for exemption from paying federal income taxes. However, those that want to obtain this exemption must file Form 1023 within 27 months of filing their articles of incorporation. Also, most nonprofits must file the informational tax report, Form 990, annually.

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