Business Growth: Establishing a Nonprofit Corporation (501(c)3)

This continues our series on establishing the right legal entity for your business. I am not an attorney. Seek advice from a legal expert.

Legal Zoom states “Forming a nonprofit organization is a powerful way to support a worthwhile cause. As a nonprofit entity, you are eligible to receive private and public grants and apply for tax-exempt status from the IRS. When you have applied for tax exempt status you can solicit tax-deductible donations, which is critical to fundraising.”

Qualifications to File a 501c3

The IRS define exempt purposes as

“The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”

Restrictions to a 501c3

The IRS states

“To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.

The organization must not be organized or operated for the benefit of private interests, and no part of a section 501(c)(3) organization's net earnings may inure to the benefit of any private shareholder or individual. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.”

Join me on Tuesday when we discuss the legal entities called trusts