Nonprofit Basics: A Different Side of Charitable Giving

starting a nonprofitStarting a nonprofit can be a great and fulfilling way to give back your community. The key to a nonprofit is having a charitable purpose. This could be the advancement of education, relief efforts from poverty or natural disasters, or any other purpose beneficial to a community. Nonprofits are effective in advancing change or providing assistance where individuals may otherwise lack the necessary funding and resources. This is because most tax-exempt organizations incentivize donations by making them fully tax-deductible to donors.

What is a Nonprofit

It may seem obvious, but a nonprofit is not a for-profit company—meaning its purpose is not aimed primarily at making money. Rather, a nonprofit is operated to serve a public need. Money raised by a nonprofit is invested only in carrying out its purpose and no part can be distributed to benefit its members, directors, or officers. This means persons involved in the management of a nonprofit are not paid salaries merely for their participation or title. Also unlike for-profit companies, no one owns a nonprofit and it cannot be sold. Instead, it is managed by a board of directors and/or its members, and if the nonprofit shuts down, its assets are distributed to another tax-exempt organization.

Forming a Nonprofit

Forming a nonprofit starts at the state level. In Texas, a nonprofit can be formed as either a nonprofit corporation or an unincorporated nonprofit association. A nonprofit corporation is the most common for organizations needing to raise a lot of money and whose donors want the benefit of tax deductions. Alternatively, an unincorporated association is simple, informal, and best for small organizations whose activities are mostly internal and do not require significant funding. Without incorporating, however, a nonprofit cannot apply for tax-exempt status from IRS and therefore cannot collect tax-deductible donations.

After formation, a nonprofit can apply for its tax-exempt status with the IRS. Obtaining this exempts a nonprofit from paying corporate income tax on income generated from activities substantially related to the nonprofit’s purpose. To become tax-exempt, the corporation must meet certain IRS requirements, including key provisions in its bylaws and governing documents. To maintain its tax-exempt status, there are additional requirements dependent on its designation under the Internal Revenue Code. The most common designations are public charities and private foundations.

Public vs Private

A public charity is what people usually think of when they hear the word nonprofit or charity. It is an organization either “publicly supported” (deriving a substantial portion of its support from the public) or functions to “support” one or more public charity organizations.

A private foundation is generally established with funds from a single source or specific sources, such as family or corporate money—instead of from the general public. Although contributions to private foundations technically are tax deductible, many of these nonprofits do not accept donations. Instead, private foundations usually invest their principal funding and distribute the income for charitable purposes in the form of grants or gifts to other nonprofits. In this way, private foundations help the charitable, educational, religious, or other public causes.

These are just a few of the factors concerning nonprofits. There are many others relevant and necessary in forming a nonprofit and maintaining its ongoing success. If you are ready to make your mission a reality, or have begun the process but need help understanding these requirements, we are here to help. Please contact us with any of your questions. You may view our full range of attorneys here: attorney profiles.