Is there a cause you care strongly about, such as the environment, poverty, or social justice? If so, you might want to explore the advantages of creating a nonprofit organization.

Top 6 Nonprofit Corporation Advantages

1. Limited Personal Liability
2. Perpetual Existence
3. Better Fringe Benefits
4. Exempt from Federal Income Taxes
5. Access to Grants
6. Consumer Appeal

Maybe you’re wondering why it’s not enough to just gather like-minded friends together for a Sunday afternoon of picking up trash or serving soup to the homeless without giving your activities the formal accolade of a business enterprise. Of course, there is nothing stopping you from doing such altruistic activities, but if you want to create a formal organization, you’ll want to reap some of the benefits of becoming a 501(c)3, named after the section of the tax code wherein the IRS spells out the criteria for forming a not-for-profit business.

What is a Nonprofit Organization?

There are many types of nonprofit organizations, each of them geared toward a different concern. Some are scientific, focused on conducting research—like finding cures for diseases or developing technology for clean drinking water. Others may be political. Many are religious, such as a church, synagogue, or mosque. The thread that ties them all together is that the primary purpose of the nonprofit is to provide a benefit to the public, as opposed to clubs, cooperatives, companies, or corporations that primarily benefit owners and shareholders.

True, companies in the private sector can also provide benefits to the public. If they didn’t, they’d more than likely go out of business. It’s also true that while a nonprofit’s purpose can be primarily for addressing a public need—charitable, literary, scientific, or spiritual—nonprofits can also create tangible benefits for their owners and investors.

Top 6 Nonprofit Corporation Advantages

There are many advantages of a nonprofit organization to support your charitable organization, including:

1. Limited Personal Liability

One of the primary advantages of a nonprofit organization is that you gain a measure of liability protection. This will separate your personal assets, such as your home, bank account, and movable property, from the nonprofit. This will prevent you from being held personally liable for the actions of a fellow owner, investor, or employee.

It is still possible in rare instances to have these assets targeted by a plaintiff seeking recovery, but generally speaking, it’s a first good step toward limiting personal liability as a business owner.

2. Perpetual Existence

Another advantage of a nonprofit organization is that it will provide your endeavors with perpetual existence. This means that the directors, investors, donors, and benefit recipients from the nonprofit can continue to enjoy its good work, even after the parties that created it have moved on to other ventures.

While most business owners in the private sector would appreciate this benefit, it can be especially meaningful for the founders or directors of a nonprofit who are passionate about making the world a better place for the next generation.

3. Better Fringe Benefits

Another advantage of a nonprofit organization is they also enjoy some excellent fringe benefits, such as receiving discounts on the goods and services they need to run their operation.

For example, if you want to set up a presence for your nonprofit organization at a fair or event to spread the message about your services, the event host may provide reduced booth rates.

4. Exempt from Federal Income Taxes

Registered nonprofit organizations can apply for tax exemptions at the federal and state levels. In most states, in order to apply for an exemption from state income taxes, you must show proof that the IRS has exempted you from paying federal taxes. Though it is possible to do so without officially incorporating, it is much easier to achieve this type of recognition from the IRS if your nonprofit is formalized on paper.

Keep in mind that some types of businesses you wouldn’t normally think of as nonprofits are incorporated as such, such as a country club. A country club is meant to provide a place for communal recreation, but it does not fall into the category of nonprofits that can easily obtain tax exemption, like hospitals, religious organizations, charities, and educational enterprises. Check with your attorney or tax advisor to determine whether your nonprofit is eligible for tax exemption.

5. Access to Grants

One of the biggest reasons to make your nonprofit official is that it will give you access to more funding. Organizations issuing grants will want to see that they are providing money to a vetted organization run by a responsible team of directors. Grants given to a 501(c)(3) can also become a tax deduction, which is appealing to the grant writers.

While nonprofits do rely on donations from everyday people, many nonprofits satisfy their budgetary needs through grant money—whether those grants are from the government, businesses, or even private individuals who have established a trust.

If you’ve already looked for funding, you’ve probably realized that many grant donors are looking to give to nonprofit corporations that are established as a 501(c)3. We recommend looking into resources like our How to Start a 501(c)3 Workshop to learn more about getting the application process started.

6. Consumer Appeal

Though it’s not the main reason for creating a nonprofit, many of these organizations have considerable consumer appeal. One reason is that a donation made to a nonprofit is tax-deductible. This also includes items like property or vehicles as well as cash. Moreover, potential donors will feel better about giving to a cause if they know there is accountability as to where the money is going.

What Are the Requirements to Start a Nonprofit Organization

Wondering how to start a nonprofit? First, you will need to register the name of your nonprofit. Then, you will need to check your state’s list of entity structures. Also, take careful note of which ones facilitate the tax exemptions mentioned above. You will also need to recruit directors, officers, and treasurer. In some states, the same person can fill multiple roles, but there may be residency requirements.

You will need to appoint a registered agent (such as the experts at Anderson Advisors). You also will file articles of incorporation, obtain federal and state tax ID numbers, including an employer identification number.

There are some continuing requirements after you have met these initial steps. You need to create documents that outline corporate governance and store records properly. Once this is done, you can apply for 501(c)3 status. In some states, you will need to apply separately for the right to engage in charitable solicitations or fundraising.

Are There Any Disadvantages to Becoming a Corporate Nonprofit?

Turning a public charity into a legal entity does have its costs. While there are many advantages of a nonprofit organization, obtaining nonprofit status according to the IRS requires time and money. These costs generally run from a few hundred to a few thousand dollars and vary by state. Compared to starting a small business, the nonprofit sector has a fairly low entry threshold. Rather, they are part of the ongoing process of complying with the internal revenue code.

Gone are the days when you could just cook and serve food out of your kitchen, organize park cleanups, or provide financial counseling to low-income families. Now, you need to retain financial statements, put nonprofit employees on a payroll, and perhaps even provide employee benefits.

The upside of these new demands and responsibilities, however, is that you will be able to engage in substantial fundraising efforts, obtain tax exemption, and solicit funding from a private foundation or government grant. In this way, the nonprofit world is not too different than the private sector. But if you want to take your organization to the next level, you will have to put in the time, money, and paperwork.

Of course, you can also invest in having someone else do the paperwork, which leaves you more time to promote your cause as a nonprofit leader. The same way a business owner will have more time and energy for running and growing their business if they outsource the legal and tax considerations to a competent third party.

What other Disadvantages are there Nonprofit Organizations?

When it comes to paperwork, you’ll need to fill out IRS Form 1023 to apply for 501(c)3 status. It is a rather lengthy application, with a three-to-five-month turnaround time. There are other forms you will need to fill out with the state and IRS to maintain your 501(c)(3)s status as well. Then there are grants to apply for, some of which are rather lengthy and require convincing material about why the nonprofit deserves a significant charitable contribution. For this reason, many nonprofits appoint a grant writer to find and apply for grants. All these responsibilities can take a lot of time and effort. Many find it best to consult with competent lawyers, accountants, and tax advisors to ensure you’re staying compliant.

The last drawback to nonprofits is that a board member, director, or employee cannot take any of the profits. The workaround to this is paying yourself a salary. But otherwise, the profits must go back into the cause or community. If you are caught taking the profits from a nonprofit endeavor, you risk fines, fees, and penalties—ranging from the loss of nonprofit status to actual jail time.

All in all, most of these cons have a workaround or are not any more difficult than they would be for a small business owner. With a good team by your side, you’ll find that taking the bad with the good empowers you to address the bigger issues of your cause.

Nonprofit Organizations Are a Vehicle for Creating Change

Registering your charitable cause as a corporation may seem a bit cumbersome. However, the truth is that making your philanthropic efforts official can create more opportunities for soliciting donor contributions.

You’ll gain access to grants and avoid paying taxes. All of this money goes back into the causes you support. You’ll also have an easier time soliciting tax deductible donations from everyday people.

You can learn more about the many benefits of forming a nonprofit corporation by applying for an entity formation blueprint from Anderson Advisors. Let us help you make the world a better place—sign up for a free consultation today!

As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, a great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets.

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