While you may be familiar with the existence of nonprofits, you may also be wondering about the financial and logistical details of launching a nonprofit, what makes them so special and why you should consider establishing one. Essentially, nonprofits are granted their special status from the federal government because they have declared a purpose that is different from that of a regular business structure. Nonprofits have no intention of creating excess revenue for their shareholders or those who are involved in managing the business. Instead, they are given a unique tax exempt classification as long as they adhere closely to their mission. Here are some questions you might be wondering about.
1. Question: What does nonprofit status really mean?
A nonprofit status means several things about the entity that holds it. The entity must necessarily have gained its nonprofit categorization after declaring a mission that is service- oriented, educational, philanthropic, literary or scientific, charitable, environmental, or religious in nature. The entity must not be concerned with making revenue beyond what it needs to pay its employees and cover its basic overhead costs. As long as the entity sticks to activities that are related to its purpose, it is not required to pay the same federal and state taxes that other businesses must. A nonprofit generally raises funds through many different channels, and these funds are tax exempt due to its intention to serve a broader mission that is not simply generating revenue.
2. Question: How do I raise funds as a nonprofit?
There are numerous ways that nonprofits have great success raising money for their organization. Some of the most common methods are hosting fundraising events, such as banquets, carnivals, sales, auctions and fairs, setting up thrift stores or charity shops to sell donated goods for low prices, or hosting community events in which they offer a good or service in exchange for donations. One popular way that a nonprofit can raise funds for itself is via the Internet. Many nonprofits set up websites or launch video campaigns which serve to spread their message and mission and then pull in donations from a wide audience. As a nonprofit, as long as you are engaged in activities that are related to your purpose, your fundraising possibilities are limitless.
3. Question: What kinds of taxes do I have to pay as a nonprofit?
While most nonprofits are generally exempt from any regular federal and state business taxes, there are situations in which a nonprofit must pay taxes. These circumstances arise when a nonprofit has generated funds in a way that is not related to its purpose, and these funds go over and above what the organization needs to cover its costs of doing business. If a nonprofit is engaging in sales or other profit-producing activities that are not closely tied to its mission, especially if its employees are spending a significant amount of time or energy on these activities, then the money that is earned as a result will be taxed under the standard tax structure.
4. Question: What do I need to do to establish a nonprofit?
Incorporating your nonprofit corporation is the first step that you must take to launch this new entity. Be prepared to pay a document fee, give a name and address to the nonprofit, and potentially name those individuals who will be a part of the organization. After incorporating the entity, you will then have to file all the appropriate paperwork that is necessary to achieve nonprofit status. You will need to state your purpose and back it up with the required supporting evidence. Once this step is done and your plan is approved, you will have tax exempt status.
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