An initial question for every startup nonprofit is, what is needed to legally become a nonprofit? Trying to become a 501(c)(3) nonprofit might not be right for every nonprofit, or it might not be right at that particular point in time. Filing for 501(c)(3) status takes an investment of time, effort and money. Therefore, a startup nonprofit should consider its activities and strategies before determining whether to merely organize as a state nonprofit corporation or to take the additional step of becoming a 501(c)(3).
A nonprofit corporation is a legal entity organized under and governed by the laws of the state in which it is created. Creating a nonprofit corporation is typically a simple process that requires a small fee, the appropriate paperwork and an annual filing with your state’s tax office. The benefits of becoming a nonprofit corporation under the laws of your state are that you create a legal entity that can have its own bank account, own property, and enter into legal agreements. Moreover, the nonprofit corporation will provide some liability protection to its members. The ability to perform these administrative tasks simplifies the management of your nonprofit. The formation of a nonprofit corporation under state law is also a required step before you can file for 501(c)(3) status with the IRS.
Forming a state nonprofit corporation might be adequate for smaller nonprofits that do not plan on significant growth and for who the investment in 501(c)(3) status is not worth the commitment of the nonprofit’s resources. Creating a nonprofit corporation can be a good initial step for a startup nonprofit as it is attempting to grow before making the investment to become a 501(c)(3) nonprofit. Ultimately, however, 501(c)(3) status is required for nonprofits to grow and confers many benefits such as the tax deductibility of donations and the ability to apply for a wider range of grants.
This information is meant merely to be informative and does not constitute legal advice. Please consult with your attorney regarding any of the above-discussed issues.
FAQs about Nonprofit Corporations from the Texas Secretary of State: http://www.sos.state.tx.us/corp/nonprofitfaqs.shtml
FAQs from the IRS about 501(c)(3) Status: http://www.irs.gov/charities/charitable/
– by Nick Meyer