“Americans of all ages, all conditions, and all dispositions constantly form associations. They have not only commercial and manufacturing companies, in which all take part, but associations of a thousand other kinds, religious, moral, serious, futile, general or restricted, enormous or diminutive. The Americans make associations to give entertainments, to found seminaries, to build inns, to construct churches, to diffuse books, to send missionaries to the antipodes; in this manner they found hospitals, prisons, and schools. If it is proposed to inculcate some truth or to foster some feeling by the encouragement of a great example, they form a society. Wherever at the head of some new undertaking you see the government in France, or a man of rank in England, in the United States you will be sure to find an association.” Alexis de Tocqueville
No matter what a person may think about the proper role of government versus the strengths or limitations of private sector institutions, few would object to the notion that there are instances where neither of these is sufficient for some of the challenges that exist in our society.
Whether the goal is to feed the homeless, rescue abandoned animals, provide support services for cancer patients and their families, run a youth soccer league, or some other charitable purpose, Americans of all stripes and in all walks of life are able to band together to achieve some common purpose through the formation and operation of non-profit organizations.
What is a non-profit company?
Not-for-profit, or charitable, organizations are often referred to as the “third sector of the economy.” These organizations allow private citizens to serve a niche sector of the community through the ability to raise funds as tax exempt entities under section 501( c)(3) of the Internal Revenue Code.
Setting up a non-profit company has many benefits, but there are legal requirements that need to be followed before those benefits can be realized. In Massachusetts that means, among other things, filing articles of organization with the Corporations Division of the Secretary of State’s Office along with the required filing fee. It can also mean completing the necessary paperwork to apply for federal tax exempt status with the IRS.
What are some of the benefits of forming a non-profit company?
Tax savings: One of the most important benefits, of course, are the exemptions from state and federal taxes that your organization will enjoy. Under current law, the top federal tax rate on corporate income is 35%. In addition to federal taxes, any corporation doing business in Massachusetts is subject to the Massachusetts corporate excise tax, which is a combination of a corporation’s property/net worth and net income.
However, as explained on the Massachusetts Department of Revenue website:
“… any corporation that is exempt from the federal income tax under section 501 of the Internal Revenue Code (and has received the 501 exemption from the IRS), or is organized under M.G.L. Ch. 157, sec. 10, is exempt from the Massachusetts corporate excise tax.”
Obviously, any money that does not have to be paid in taxes can be applied toward achieving the organization’s goals and used to fulfill the organization’s charitable mission.
Encourage donations: By donating to an entity with 501( c)(3) status, individual donors can take advantage of the federal charitable deduction when filing their annual tax returns. In this way, citizens are free to support causes that are dearest to them, either by providing much-needed funding or by participating in the formation, management and charitable activities that an organization is dedicated to serve.
In addition to the the benefits found in fundraising from individuals, 501( c)(3) entities may be eligible to receive grants from government agencies and to accept donations from private foundations.
Personal liability protection: Just as incorporating a business shields owners, executives, directors and employees from personal liability for business-related injuries and debts, those same protections apply to members of non-profit corporations.
Organizational immortality: Incorporation means that the company is a separate legal entity from the individual(s) who originally founded it. This enhances the organization’s ability to attract donors who are interested in making a long term commitment, since its charitable activities can continue long after the individuals who established it have moved on.
Miscellaneous benefits: Depending on the mission, a charitable organization might be eligible for lower postal rates, and may even be able to take advantage of reduced advertising rates, including spots on television and the radio.
What are the disadvantages in forming non-profit companies?
Filing fees: Depending on the size of the organization, an application for obtaining tax exempt status must include a user fee when submitted to the IRS. Those fees range from $400-$850, and are determined based on the association’s gross receipts. That doesn’t include any state fees associated with incorporating the organization.
Lots of paperwork: After the organization has been formed, it may be required to file annual reports with the state. As explained on the website of the Massachusetts Attorney General, “all public charities operating in Massachusetts [are required] to register and file annual reports with the Attorney General’s Office Non-Profit Organizations/Public Charities Division.” In addition, as corporations, non-profits must hold and keep detailed notes of meeting minutes, and must follow other corporate formalities.
Strict public oversight: Even though the organization is run by a board of directors who must adhere to the organization’s charitable mission, the Attorney General is ultimately responsible for overseeing the company’s activities (at least in Massachusetts).
Difficult to dissolve: Given the significant public benefits provided by non-profit corporations, a Massachusetts non-profit can only be dissolved “with the approval of the Attorney General’s Non-Profit Organizations/Public Charities Division.” Also, if the organization has assets in any amount during the time of the dissolution, a petition must be filed with the Supreme Judicial Court.
Anyone interested in forming a non-profit company should carefully review the goals and mission, and should weigh those against the benefits and disadvantages of forming and operating such an entity. On balance, the ability to benefit a subset of your community is a great way to give back, and the positive results will be immediately visible to you along the way.
Forming a non-profit company should be a rewarding choice if you have a passion for a particular cause and are looking for ways to give back to your community.