By B. Michael Young, MBA Candidate

The George Washington University

There are currently thousands of non-profit corporations in existence today. Each non-profit entity has it’s own, distinct purpose and mission for which it was originally established. There are several steps that should be followed and several issues to take into account when considering the establishment of a new non-profit corporation. Some initial things to consider and understand are as follows:

A non-profit corporation is defined as an organization in which no profit may be used to the benefit of its members. This definition does not preclude a non-profit corporation from making a profit, which may seem inconsistent with the name "non-profit corporation". In fact, non-profit corporations should be governed as if they are a business, and profit-generation should be one of the goals of the non-profit corporation. The owner/CEO must understand that the profits cannot be used to the benefit of its members and must, therefore, understand and adhere to the standards and guidelines that are set and governed by the state in which the non-profit corporation is incorporated.

There are several benefits that are available to a corporation that is established as a non-profit. These are as follows:

• A non-profit corporation may apply for and receive exemption from federal income tax. It is very important to note that a non-profit corporation in and of itself is not automatically exempt from federal income tax, but must go through the application process to receive the exemption.
• Securities that are issued by non-profit corporations may be exempt from federal regulation.
• Non-profit corporations may be considered for reduced postal rates.

There are also several liabilities associated with non-profit status such as:

• Non-profit organizations normally must rely on public financial support (including membership fees if applicable, grants, personal donations, etc..) which may or may not be forthcoming or easily obtainable. Since there is normally not a product or service that is being sold, the non-profit is at the mercy of the consciousness of the general public, which is not a reliable or consistent source of revenue.
• Most non-profit corporations are not qualified to receive equity or debt financing.
• Non-profits cannot distribute profits to its members, which may hinder them from enticing members to join their organization.

A tax exempt enterprise is a non-profit entity that is exempt from federal income taxes, therefore, is not required to pay taxes on any income generated during the year. When an individual or a corporation contributes to a tax-exempt enterprise, that individual or corporation may take a tax deduction for their contribution.

Once these issues are understood, the process of forming a non-profit can begin. The steps in the formation process are as follows:

1. Identify the purpose, mission and goals of the corporation. Though a business plan is not necessarily a requirement, it is recommended. This process may help you determine your funding strategy, staff requirements, and volunteer requirements.
2. Recruit a board of directors and officers for the organization.
3. Develop by-laws for the organization. It is recommended that the board of directors and officers be consulted on the development of these by-laws.
4. Research and understand the guiding principles in becoming a non-profit corporation.
5. Reconcile the purpose, mission, goals, and by-laws with the guiding principles to ensure that there is some consistency.
6. Hire a tax accountant who specializes in the incorporation of non-profits. If necessary, contact existing non-profits to obtain a referral.
7. Determine the state of incorporation. Keep in mind that each state may have different rules and regulations associated with the governance of non-profits. Find the state that has the most favorable rules and regulations.
8. Obtain the incorporation forms from the chosen state.
9. Fill out and file the incorporation forms.
10. Request a Federal ID Number
11. Once the state has approved the incorporation and the Federal ID Number is established, request exemption from taxation. ( File form 1023 and pay the associated fee).

The process can become a bit tedious and time consuming, but should be followed as closely as possible. The tax accountant should be an excellent resource, and should have the expertise on the entire process to ensure that all steps are followed and all forms are filed. The following web sites should aid in providing resources to those interested in forming non-profits as well as managing the non-profit:

www.1800net.com/nprc/ - The non-profit resource center

www.npyp.net – The Non-Profit Yellow Pages

www.nonprofit-info.org – The Internet Nonprofit Center

www.not-for-profit.org – The Nonprofit Resource Center

www.sftoday.com/empower.htm – Empower Web

www.allianceonline.org – The Alliance for Nonprofit Management