Question: "Someone told me that I should seek a nonprofit status for my business so I could receive grant money and tax-deductible contributions. Is that legal? What are the advantages and disadvantages of being a nonprofit business?"
Answer: Many of my clients joke that they must be a nonprofit corporation because they make no profits. However, to be considered a nonprofit business you must form a 501(c)(3) corporation and carry out a charitable, educational, religious, literary or scientific purpose. Examples of businesses that qualify are: museums, hospitals, churches, schools, performing arts groups, childcare centers and homeless shelters.
There are many advantages of forming a nonprofit corporation.
- You can qualify for tax-exempt status. Taxes don't have to be paid on the profit of your activity as long as the money you make is related to your charitable activities. In addition to an exception from income taxes, nonprofits are usually exempt from paying property taxes on real estate and other property.
- You may be eligible for public or private grant money. Many public and private grants specify that you have to have the nonprofit 501(c)(3) status to be eligible for grants.
- You may solicit tax-deductible contributions. A nonprofit is permitted to raise funds by receiving donations from individuals and companies. The tax law encourages people and businesses to donate money and property by allowing donors to deduct their contributions on their own tax returns.
- You limit your personal liability. Normally, forming a nonprofit corporation protects the directors, officers and members of the nonprofit from personal liability for the corporation's debts and other obligations. This means that if the corporation is sued, only the assets of the corporation would be at risk, not the holdings or other property owned by the individuals who manage, work for or participate in the business.
- You can take advantage of special postage rates by applying for an receiving a mailing permit that entitles them to a special reduced rate for mailings.
A major disadvantage of a nonprofit corporation is that you cannot sell it. If the directors of a nonprofit corporation decide to dissolve the nonprofit, they must pay off all debts and obligations of the nonprofit and distribute all of its assets to another tax-exempt nonprofit corporation.
If you are interested in forming a nonprofit corporation, you will need to:
- File a short document called the "articles of incorporation" with the state.
- Apply for state and federal income tax exemptions
- Write corporate bylaws that will set down the rules that govern your corporation including procedures for making business decisions, voting rights and other guidelines.
- Elect a board of directors and hold required meetings complete with minutes of these meetings recorded in a corporate records book.
If you would like more information, please contact the Small Business
and Technology Development Center near you. MO SBTDC business specialists can lead you in the right direction if you decide the nonprofit status is right for your business.
- Jeanne Dau, Small Business & Technology Development Centers, Chillicothe; reviewed 12/10/08