MightyRecruiterMuch like any other organization, it takes time and know-how to successfully run a nonprofit, but as a nonprofit, you will be exempt from having to pay taxes. This is great news for many organizations, but there are certain guidelines your business will have to adhere to in order to receive this special status. If you are thinking about starting a nonprofit, the following article will show you how to do this while keeping your tax-exempt status.
Structuring a Nonprofit
Contrary to popular belief, nonprofit organizations usually have the same structure as corporations. This means there must be a board of directors that will be in charge of making important operational and financial decisions. In addition to this, your nonprofit should have a team of officers to oversee the day-to-day operations of the company. Finally, you will need to hire employees to perform the work. The number of employees you hire will depend on the size of your organization. Unlike corporations, there are no shareholders or owners associated with nonprofits. Since no one officially owns the nonprofit, it cannot be purchased or sold. If the directors decide to dismantle the organization, they must arrange for all of its assets to be distributed. Nonprofits can, however, choose to offer voting rights to its members. This is rare, and many nonprofits simply decide to allow their boards to make all of the important decisions.
Remaining Exempt From Taxes
Nonprofits will also be required to keep accurate and thorough records of their finances. If an organization fails to keep adequate records, it risks losing its tax-exempt status. Keeping accurate records also entails holding regular board meetings to discuss issues that impact the organization. Once you compile the necessary records, you should organize them in a corporate records book. Your book should always contain a copy of your articles of incorporation, the organization’s bylaws, and an official IRS document stating that the nonprofit is tax-exempt. Financial transactions should be recorded using a double-entry bookkeeping system. In order for your nonprofit to keep its tax-exempt status, it must follow certain federal laws listed below.
- Nonprofit corporations cannot make financial contributions to political campaigns. Unlike regular corporations, which are infamous for contributing large amounts of money to political candidates, nonprofits are forbidden from making financial contributions.
- Nonprofits must pay income taxes on profits and expenses that are unrelated to its purpose or activities. If a nonprofit amasses income from unrelated purposes or activities, it must pay taxes on the income, regardless of the amount.
- Profits cannot be distributed amongst directors, employees, officers or members.This means that nonprofit employees and executives cannot use any of the organization’s profits for their own benefit. It does not mean that board members and other employees cannot receive a reasonable salary for providing their services.
- Nonprofits can only engage in a limited amount of political lobbying. Nonprofits can lobby government officials, but not extensively.
- If a nonprofit organization decides to dissolve itself, it must distribute all of its assets to another tax-exempt group. If a nonprofit ceases to exist, it must distribute all of its financial assets and profits to another nonprofit organization.
- Nonprofits may not receive extensive amounts of income from activities unrelated to its stated purpose or mission. If a nonprofit receives massive amounts of income from nonrelated activities, it will be classified as a regular corporation or business. Most of a nonprofit’s income should be generated by activities that reinforce the vision of the organization.
Final Notes
A nonprofit will be required to adhere to all of the requirements above in order to receive tax-exempt status. If it does not, the organization will be forced to pay taxes like any other business. Before you attempt to start a nonprofit, read the federal guidelines that will govern your organizational structure and tax rate.
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