Nonprofit Organizations

Nonprofit organizations are tax-exempt organizations that are eligible to receive funds from the public (that are generally tax-deductible to the donors), have limited liability and are expensive to setup.

Nonprofit organizations are organizations, such as public charities, private foundations, churches and associations that are created to address a social purpose or serving the public good. These entities qualify under Internal Revenue Code 501(c)(3), to be eligible for federal exemption from payment of corporate income tax. Once exempt from this tax, the nonprofit will usually be exempt from similar state and local taxes. If an organization has obtained 501(c)(3) tax exempt status, a donor’s charitable contributions to this entity are tax-deductible.

A nonprofit organization exists as a legal entity in its own right and separately from its founder(s). Incorporation puts the nonprofit’s mission and structure above the personal interests of individuals associated with it.  The mission must address a social purpose or serve the public.

Under the law, creditors and courts are limited to the assets of the nonprofit organization. The founders, directors, members, and employees are not personally liable for the nonprofit’s debts. However, there is an exception. Directors have a fiduciary responsibility; if they do not perform their jobs in the nonprofit’s best interests, and the nonprofit is harmed, they can be held liable

Nonprofit organizations can offer tax deductions to individuals or businesses (donors)  that give charitable contributions. This popular IRS itemized deduction strongly encourages donors to give funds to the nonprofit organization.

A nonprofit organization has its disadvantages though:

Cost: Creating a nonprofit organization takes time, effort, and money. Fees are required to apply for incorporation and tax exemption. The use of LOGO FINANCIAL or an attorney or accountant, may be necessary. Logo Financial’s setup fee for a nonprofit organization is $2,495.  This fee includes everything needed to qualify and be accepted by the IRS as a nonprofit entity.

Public paperwork: A nonprofit must keep detailed records and submit annual filings to the state and IRS by stated deadlines in order to keep its active and exempt status.A nonprofit is dedicated to the public interest; therefore, its finances are open to public inspection. The public may obtain copies of state and federal filings to learn about salaries and other expenditures.

Shared control: Personal control by the founders is limited. A nonprofit organization, in some states, is required to have several directors, who in turn are the only people allowed to elect or appoint the officers who determine policy.

NOTE: The information contained here is for general purposes to help you understand the basics. It’s not intended as tax or legal advice. Feel free to consult your own CPA or attorney to discuss your specific business questions.

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