By incorporating your business as a nonprofit organization, it will qualify for specific tax-exempt determinations. To take advantage of this benefit, your business must benefit one of the following: the public at large, a specified group, or the business’ membership.
The following are examples of nonprofit corporations:
When involved with a charitable organization, consideration should be given to registering as a nonprofit. The privileges offered to state-recognized nonprofits are well worth the extra paperwork involved. Some of the privileges are obtaining public grants, private grants, and exceptional postal rates, as well as the typical savings of income, sales, and property taxes. As a nonprofit business, donors also receive the benefit of reducing their taxes when gifting cash and property to the corporation. Incorporating the business also shields the business owners’ personal assets from creditors, should a problem arise there.
The liability protection offered to Limited Liability Companies and Corporations is also offered to nonprofits when they are legally incorporated. The assets of your Board of Directors, your trustees, your members, as well as your employees are all shielded from any liabilities the nonprofit may incur that cannot be recovered with its capital. As important as this protection is, equally important is the ability to receive grants from both private foundations and the federal government. These grants can boost not only your bottom line, but also raise your marketability for further fund raising.
Some common issues found in the operation of a nonprofit are below. Many are similar to a regularly incorporated business, but some are unique to nonprofits in general.
Separation of affairs
It should go without saying, but we must: Keep corporate moneys separate from personal moneys. Keep corporate records separate from personal records. Keep corporate accounting separate from personal accounting.
Maintain meeting schedules
Board of Directors meetings and the written records of those meetings must be kept in compliance with the applicable laws. Flexibility has been granted to small corporations so that these meetings can be held over a conference call or even in writing.
Complete all tax returns as required
Unless your business qualifies for certain narrow exemptions, even businesses with a IRS nonprofit status must file annual tax returns. For the IRS, income is reported on IRS Form 990. If the business’ fiscal year is January 1 to December 31, this form must be submitted no later than April 15.
Employer Identification Number
Comparable to an individual’s Social Security number, the EIN is the tax identification given to a business by the IRS, and is required for conducting business. Some states require an additional EIN of their own making. Even some local authorities (county or city) require business licenses.
What can and cannot an incorporated nonprofit business do? We are glad you asked. Nonprofit businesses are allowed to sell products and services (think about Girl Scout Cookies, Cub Scout popcorn, and your local hospital). Nonprofits are also allowed to pay salaries to employees and officers. The one thing they must not do, however, is to distribute profits, such as through dividends.
A nonprofit corporation is managed by directors. These directors may hold voluntary positions or they may be paid staff. The IRS determines whether any compensation provided to paid directors is reasonable•. Directors also must operate under the same principles of for profit businesses; they are to act with reasonable care and in good faith, with the company’s best interests in mind.
Most states require three directors. New Jersey is one state that does.
When a business submits its application for its 501(c)(3) status, the IRS will want to see the business has an independent and financially independent board of directors. This is the reasoning behind the requirement of having three directors serving. It is most helpful if the directors have experience working with nonprofits. Having only one director initially is not a large problem when applying for tax exempt status. More directors can be added at a later date.
The three offices that need to be filled are those of president, secretary, and treasurer. These officers are who conduct and supervise the daily operations of the business. In some states, one person can hold all three offices. In other states this is not so. We can help you sort through these types of requirements.
There are no stockholders (shareholders) in a nonprofit business. Nonprofits cannot sell stocks. However, nonprofits can have members, although this is not a requirement.
The membership structure must be formalized. This procedure can allow members certain rights (i.e. director elections, business mergers, sale of the corporation). Smaller nonprofits frequently have no members. There is paperwork and other formalities required that they prefer not to engage in.
This lack of a formal membership does not prevent a nonprofit from seeking out advisers, contributors, or patrons. These people would have no duties or privileges in the organization. Social clubs may find that there is a need for members to be able to vote on specific, important matters.
IRS tax code Section 501(c)(3) exempts nonprofits from federal income taxes for most organizations, and is the most common section under which nonprofits apply for. This section of the tax code can cover certain specialized organizations.
Many states will allow a business to use their federal tax exempt application, not requiring a separate, state-level filing. We at the law office of Kevork Adanas, P.C. can determine whether this simplification is available to your business. We can conduct the research for you, so that you can be sure that all the documentation required to receive the appropriate tax exempt status for your business are completed and filed with the appropriate government agencies.
Nonprofit corporation formation does not (and we can’t stress this enough) qualify your business for IRS tax exemption automatically. After filing for your business’ nonprofit status with your state government, there is a separate filing for the IRS. Commonly referred to as a 501(c)(3), it gets its name from the section of IRS code most often used by nonprofits. The IRS code typically applied for by social or recreational clubs is the 501(c)(7). However, there are more than twenty sections of nonprofit qualifications. We can help you determine which one is the correct one for your business.
You do not need a legal service to prepare your application. The tax exempt paperwork is available for you to take care of by yourself. However, it can be tedious, time-consuming, and complicated. A business owner can spend up to thirty hours completing the necessary paperwork, according to one IRS estimate.
When your application is submitted to the IRS, it is given to an agent. This agent can take up to five months or more to examine your application and make a decision on it, depending on his or her current work load. Don’t view this as time wasted! While we are taking care of your documentation, you can move ahead with the selection of the Board of Directors members, budget preparation, and finalizing goals, programming, and activities.
If filing under IRS code 501(c)(3) is not the correct one for your business, you may qualify for a different code section. There are twenty different sections of tax exempt code. Other sections include:
New Jersey law requires Corporations to have and appoint a registered agent and registered office in the state of New Jersey. The registered agent is responsible for receiving important legal and tax documents including notice of litigation (service of process), franchise tax forms and annual report forms.
You can operate your business even before establishing a permanent address. By using our office address as your own, we can forward mail for you between your attorney, State offices or other organizations.
With our Standard Service we will prepare your corporate package to include your certificate of organization, your Corporate Book and Seal, all regulations and any other documents you requested as part of your application. We will complete and finalize your documents on the same day your order is placed and you have spoken to one of our representatives. We will send your application documents to the State of New Jersey that same day. When your paperwork is completed by the State is based upon their own work schedule. This usually varies and can usually take between two to four weeks. If you require your corporate package sooner, please choose one of our priority options noted below.
Priority Service (2 Day)
If you require your Corporation to be formed urgently, we can file the registration forms and prepare all of the necessary documents to be ready for shipment within two business days.
Priority Service (4 Day)
If you require your Corporation to be formed quickly, we can file the registration forms and prepare all of the necessary documents to be ready for shipment within four business days.