Nonprofit Organizations
| Author | Jeffrey Wilson |
| Pages | 161-165 |
Page 161
Nonprofit organizations exist in the United States for a number of reasons. Many of these organizations are formed for the purpose of fulfilling needs in society by providing an organization that handles what the government would handle otherwise. Nonprofit organizations exist along with two other types of entities: for-profit businesses and government agencies. Each of these serves different purposes in society.
Many people associate nonprofit organizations and tax exemption, though not all nonprofit entities are exempt from taxation. Moreover, a nonprofit organization is not prohibited from earning a profit, for many of these organizations generate profits. To the contrary, the law governing nonprofit entities sets forth requirements as to what each entity must do with the profits it earns. More specifically, the law expects nonprofit organizations to devote any profits to the goal of furthering the purposes and activities of the organization.
Additionally, not all nonprofit organizations are charitable in nature. Although contributions to charitable organizations generally qualify for a charitable contribution deduction, some nonprofit entities that are not charitable in nature are also tax exempt.
One of the first steps in forming a nonprofit entity is to define the purpose of the entity. This statement of purpose, which must be made in writing, will define the type of tax exemption for which that organization is qualified. The following list provides examples of the types of tax-exempt nonprofit organizations:
Organizations formed for charitable purposes
Organizations that advocate for social welfare
Professional associations
Labor organizations
Chambers of commerce and business leagues
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Social clubs
Homeowners associations
Employee benefit funds
Fraternal societies
Political organizations
The purpose driving a for-profit business is to benefit the owners of the business. By comparison, the activities of a nonprofit entity must be conducted for the benefit of the organization and not the owners. In order to qualify for tax exempt status, the organization must benefit the public.
Once a person or group decides to form a nonprofit organization, one of the first issues that must be addressed is where this entity will be formed. Some states may be more attractive than others due to several factors. For instance, states such as New York and California are more intense in terms of regulating nonprofit entities than other states. Moreover, state laws may differ about the requirements the entity must satisfy in order to qualify for taxexempt status.
A nonprofit organization may form under the laws in one state but operate in a different state. This option may be advantageous when the laws of one state allow those who form the nonprofit entity to fulfill the purpose of the entity better than the laws of another state. On the other hand, this option is usually more costly because both the state in which the entity is formed and the state where the entity operates will charge fees.
Another complicated decision that those who form nonprofit entities must make is what organization form the entity will take. In general, nonprofit entities appear in four organizational forms, including the following: corporations, charitable trusts, limited liability companies, and unincorporated associations. Each of these forms has some benefits and some disadvantages that must be considered when the organization is formed.
The most common form of nonprofit organization is the corporation. A corporation is a creation of the law. Those who create a corporation must file a document known as articles of incorporation, which sets forth important information about the corporation itself. Once a corporation is formed, it becomes its own "person" under the law, separate from its directors, officers, or owners. The corporation itself may sue others or be sued.
A nonprofit entity benefits from forming as a corporation for two primary reasons. First, the laws governing corporations provides considerable protection to officers, directors, members, employees, and volunteers against personal liability. This means that if the corporation itself incurs liability (e.g., a third person successfully sues the corporation), those who act on the corporations behalf usually do not incur liability. Second, the law governing corporations is generally well-settled, meaning that the rules that govern the operation of...
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