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For certain types of companies, depending on the goals of the business’s founders, it is useful to form the company as a nonprofit organization in order to be able to more easily accept donations and possibly achieve tax-exempt status. Nonprofits operate with specific guidelines that make them unlike other companies, so how are you to decide whether that form of business is right for you? Below is information about some of the questions that you might have.

What types of companies can operate as nonprofits?

There are five categories qualify for eligibility to be nonprofit companies- religious, charitable, scientific, educational and literary.

Why do companies form as nonprofits?

All five types of company in the US have a 501(c)(3) designation from the Internal Revenue Service that allows donors, whether individuals or businesses, to deduct their donations to the nonprofit on their tax return, making it easier for the company to raise money. Additionally, some nonprofits qualify for tax-exempt status that releases the company from the need to pay taxes on contributions and receipts.

How does a nonprofit qualify for tax-exempt status?

One of the company’s operators must fill out and send in IRS Form 8718 and Package 1023. Depending on which state the company is based in, it may also be necessary to complete documents that release the company from liability for state taxes.

Must a nonprofit be formed as a corporation?

No, but there are benefits for it doing so. Nonprofits can be formed as unincorporated organizations, but incorporating provides a company with limited liability protection that shields the owners and operators from personal financial responsibility in the event of a lawsuit. Thus, the personal assets of the operators can not be seized due to the negligence or criminal activity of another person in the company. It is required for nonprofit, like any other company, to have a registered name.

How is a nonprofit corporation formed?

As with any other business, a nonprofit starts with a vision and mission statement, and there should be a business plan. The business plan is vital when looking for early funding and a solid board of directors and management team. The founders must draft the Articles of Incorporation, a legal document, or have their attorney do so. They must name the company and pay a filing fee and register with the state’s agency that handles charitable organizations, which is the Attorney General in most states.

Are there other requirements in forming a nonprofit?

Yes, but they are not different from other sorts of companies. Nonprofits have a legal document that states their bylaws, or the rules that define the company’s goals and mission, and they have a board of directors who are in charge of the company’s operations and financial management.

Are there other ways to serve the community aside from starting a nonprofit company?

Starting a nonprofit is risky and requires much planning and financial investment. You can serve the community by joining another charitable organization, or by consulting for it. There is less freedom to pursue the precise cause that you want, but that comes with less risk of financial loss. You can also receive government grants, find a fiscal sponsor or join an existing organization’s board of directors, which may offer you the opportunity to direct a wing of the company toward your desired mission. You might also form a for-profit venture and become a social entrepreneur.

How can I obtain funding for my nonprofit?

There are many foundations that exist for the specific purpose of managing donated funds and distributing them to nonprofits that the managers think will be most effective. You might also seek funding from individuals through advertising in a publication, on a billboard, by phone or through email or direct mail. The US government and many foreign governments also provide funding through grants for many different causes.

How much does it cost to file for tax-exempt status, and how long does it take?

The cost of the filing fee varies by state, but is typically between 400 and 800 dollars. Once IRS Form 8718 and Package 1023 are sent to the federal government, the IRS often returns its decision on whether or not the company will receive tax-exempt status within a period of 3 months to 1 year.