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Phone Number : 302.652.4800

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Understanding non-profits as a potential business structure

Nonprofits may enjoy federal tax exemptions

Nonprofits may enjoy federal tax exemptions

Entrepreneurs who are considering organizing a business for altruistic purposes should know the benefits and requirements involved in forming a non-profit. The legal definition of the term does not mean that these types of organizations are restricted from earning profits, but rather prohibits them from forming with the explicit purpose of generating a profit that is paid to ownership. Instead, surplus revenues are put back into the operation and management of the organization.

Non-profits are normally formed to provide some type of public benefit, and for that reason, they may enjoy a number of financial benefits at the state and federal level. Some non-profits quality for federal tax exemptions, though not all are eligible. An accountant specializing in Nonprofits can offer guidance and consultation for aspiring non-profits that wish to seek federal tax relief.  Once questions have been answered, an incorporation service company can prepare and process the incorporation quickly and efficiently.

How to form a non-profit

The first step is to incorporate the business in their desired state. Some entrepreneurs choose to incorporate in Delaware because of the state's favorable business climate, while others choose the state in which they are located or from/will be working from. As with any type of company formation, the organization must file for an Employer Identification Number (EIN) once incorporated. An EIN number is a federal identifier required for any business that wishes to employ workers, since the EIN is needed to process tax withholding.

Once the non-profit has obtained the EIN (Tax ID Number), it can then file for tax exemption by declaring itself to be a Charitable Organization or Tax-Exempt Organization by submitting IRS forms 1023 or 1024, respectively. You may have heard non-profits refer to themselves as 501(c)(3) organizations which means they have filed under that particular tax code, identifying themselves as a charitable organization. While it is very important to obtain the services of an accountant for acquiring tax-exempt status, an incorporation specialist can aid in the non-profit formation process.