All sorts of groups, from artists and musicians to people active in
education, health and community services wish to operate as nonprofit (or
not-for-profit) corporations. Often the reason for doing this is simple --
nonprofit status is usually a requirement for obtaining funds from government
agencies and private foundations. Obtaining grants, however, is not the only
reason to incorporate. Here, we discuss two additional important benefits of
forming a nonprofit -- tax-exempt status and personal liability protection.
In addition to qualifying for public and private grant money, most nonprofit
groups seek nonprofit corporate status to obtain exemptions from federal and
state income taxes. The most common federal tax exemption for nonprofits comes
from Section 501(c)(3) of the Internal Revenue Code, which is why
nonprofits are sometimes called 501(c)(3) corporations.
If your group obtains tax-exempt status, not only is it free from paying
taxes on all income from activities related to its nonprofit purpose, but
people and organizations that donate to the nonprofit can take a tax
deduction for their contributions. Furthermore, if you set up a tax
exempt corporation as part of your estate plan, all sums donated by you from
your trust or will are fully deductible from your taxable estate for estate tax
Forming a nonprofit corporation normally protects the directors, officers and
members of the nonprofit from personal liability for the corporation's debts and
other obligations. Called "limited liability," this shield ensures
that anyone who obtains a judgment against the nonprofit can reach only the
assets of the corporation, not the bank accounts, houses or other property owned
by the individuals who manage, work for or participate in the business.
We at the Law Offices of Jay A. Rose have set up numerous Tax Exempt
Nonprofit Corporations. Although obtaining approval from the IRS is a
daunting task, we help those seeking this type of organization to navigate the
waters of state and federal regulations.