Should Your Charity Incorporate? The Pros and Cons
Tax Deductions and Reduced Liability Are Top Persuaders
State incorporation is usually the first step towards becoming a fully tax-exempt charity (501c3) with the IRS.
As a charitable nonprofit corporation, your organization can get state and federal exemptions from corporate income taxes plus certain other taxes. Federal corporate tax rates can be very high while state corporate taxes can take a bite as well.
If you expect to earn large amounts of money from your mission-related services, exhibits, product sales, or performances, you'll want to seek an exemption. A tax-exempt nonprofit also saves on local taxes from state and county, including property taxes.
Tax-Exempt Public and Private Donations
Once incorporated, most charities go on to apply for nonprofit designation from the IRS. As a 501(c)(3) nonprofit you can receive grants and donations. Foundations only give grants to 501(c)(3) organizations.
Individual donors to your nonprofit corporation can claim personal federal and state income tax deductions when they itemize deductions. although fewer people do this under the most recent tax laws Bequests may also be exempt from federal estate taxes.
Protection From Personal Liability
One of the most significant advantages of incorporation has to do with protecting members of your organization from personal liability.
Board members, officers, and employees of your organization receive protection from liability for corporate debts or lawsuits. Creditors can only go after your organization's corporate assets, not the personal assets of the people who manage, work for, or volunteer for your nonprofit.
Personal liability can also occur should a staff member or volunteer strays outside the boundaries of what is permissible politically. Nonprofits can only participate in limited political activities. If someone becomes overzealous and oversteps the boundaries, the organization could be sued. Incorporation provides protection.
Even if you do incorporate and receive some of these protections, it is wise to purchase liability insurance to cover situations that may lie outside of incorporation law.
A corporation is separate from the individuals who manage or organize it. It is this separate legal existence that provides protection from liability. But it also means that the organization becomes immortal in a way.
The nonprofit corporation continues to exist beyond the lifetime or involvement of the people who began it or who have managed it. Because the organization persists in this way, it is more attractive to donors who want to fund a cause for the long term.
Being a corporation opens the door for employee benefits such as group life insurance, health insurance, or a pension plan, advantages not always available to workers in unincorporated organizations.
Forming a nonprofit corporation is not simple. But the preparation forces clarity about mission, operating rules, and procedures for decision making.
It's essential for a nonprofit, whose board members may hold opposing ideas, to have clear-cut rules about delegation of authority and how to get things done. Having all of these principles in the articles of incorporation and bylaws makes running the organization much easier.
Other advantages of incorporation include exemptions from county real and personal property taxes, lower postal rates on third-class bulk mailing, cheaper advertising rates, free radio, and television public service announcements (PSAs), and more—depending on your activities.
Disadvantages of incorporation include a lot of paperwork and some expense. For instance, you may need to hire a lawyer to prepare your documents. Then there is the time and energy to comply with regulations and to grow your organization.
But if the benefits of incorporating make sense and outweigh the disadvantages, you may be ready to move ahead. Certainly, if you anticipate that your nonprofit will grow, it would be wise to incorporate and apply for tax exemption earlier rather than later.
If you don't incorporate, you might be an unincorporated nonprofit association.