Advantages of forming a nonprofit organization include:
Tax exemption: Those organizations that qualify as public charities under Internal Revenue Code 501(c)(3) are 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. Tax exemption is not automatic for those agencies that incorporate as nonprofits; they must apply to the IRS and to appropriate state and local governments for tax-exempt status.
Eligibility for public and private grants: Nonprofit organizations are allowed to solicit donations from the public. Contributions to public charities offer tax benefits to individuals. Many foundations and government agencies restrict their grants to public charities.
Formal structure: Although a person or group of people created it, a nonprofit organization exists separately from those individuals as a legal entity in its own right. Incorporation puts the mission and structure of the nonprofit above the personal interests of individuals associated with it.
Limited liability: 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. (There are exceptions. A person cannot use the corporation to shield illegal or irresponsible acts on his/her part. Also, directors have a fiduciary responsibility; if they do not perform their jobs in the best interests of the nonprofit, and the nonprofit is harmed, they can be held liable.)
Given these advantages, why would you not want to incorporate as a nonprofit? The disadvantages include:
Cost: Creating a nonprofit organization takes time, effort, and money. Because a nonprofit organization is a legal entity under federal, state, and local laws, the use of an attorney, accountant, or other professional may well prove necessary. Aside from legal or other consultant fees, incorporation in most states, including the application for federal tax exemption, costs $200–$400.
Paperwork: Because it is a legal entity, a nonprofit organization will be required by the state in which it is incorporated to keep detailed records. Certain documents—articles of incorporation, bylaws, annual reports, financial records—must be prepared in a specific manner and filed with specified agencies by certain deadlines. The nonprofit may also have to file Form 990 with the IRS annually.
Shared control: Although the people who create nonprofits like to shape and control their creations, personal control is limited. A nonprofit organization is subject to laws and regulations, including its own articles of incorporation and bylaws. In some states, the nonprofit is required to have several directors, who in turn are the only people allowed to elect or appoint the officers who determine policy.
Scrutiny by the public: A nonprofit is dedicated to the public interest; therefore, its finances are open to public inspection. The public may obtain copies of a nonprofit organization’s state and federal filings and learn about salaries and other expenditures.
Other Web resources on the advantages and disadvantages of forming a nonprofit organization include MyCorporation.com and Business Filings Incorporated.
The Foundation Center’s Web site provides useful information on starting a nonprofit organization. In the Get Started you will find an online tutorial, "Establishing a Nonprofit Organization," and the FAQ "How do I establish a nonprofit organization?" Other FAQs on establishing a nonprofit organization provide links to sample documents, including nonprofit bylaws and articles of incorporation.
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