Reasons to Form a Nonprofit

Reasons to Form a Nonprofit

Even though unincorporated associations can qualify for tax exemption, many people may assume that the only reason to incorporate as a nonprofit is to acquire 501(c)(3) status. This is not the case.

With regard to tax exemption, 501(c)(3) may be the most well-known type of tax exemption – and perhaps the most sought after, since it allows donors to write off contributions. Nevertheless, there are many types of tax exempt categories in the Internal Revenue Code. Political Action Committees, for example, are tax exempt under section 501(c)(4) of the Code. There are additional categories for everything from Cemetery Corporations to Black Lung Trusts. Each type of tax exempt category places different restrictions on corporations, but the point is that there are many opportunities to avoid tax liability as a nonprofit.

But there are perfectly good reasons for incorporating as a nonprofit that have nothing to do with taxes. Practically speaking, business corporations are formed for one purpose – to profit the shareholders. If a group of people would like to achieve any other purpose, it should consider nonprofit incorporation. After all, business decision-makers may be bound to pursue any opportunity that would benefit corporate shareholders. This could involve a corporation in activities totally unrelated to its original purpose. But nonprofit corporations are formed for the purposes listed in the certificate of incorporation. Any nonprofit corporate action that strays too far from that purpose may be challenged in court. Once assets are placed in the hands of the corporation, they cannot be used for any other purpose. Therefore, nonprofit incorporation allows individuals to avoid personal liability, while also avoiding the risk that the corporation and its assets are “hijacked” by the largest shareholders.

Chances are, most nonprofit corporations will fall under one of the many tax exempt categories. But even if that weren’t the case, groups that are committed to achieving any particular purpose other than the financial gain of shareholders should consider using the nonprofit corporation as a means to that end.

Corporate Counsel

If you have any questions about this or other legal issues, feel free to call the Law Firm of Vaughn, Weber & Prakope, PLLC at 516-858-2620 today to schedule a free consultation.