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All nonprofit organizations have a mission statement that they work toward fulfilling. Objectives for nonprofits are primarily arts, education, cultural, civic, advocacy and social in nature. Once a nonprofit organization is created, there are certain laws and rules that dictate how it should function. One of the primary rules that a nonprofit must adhere to is that the organization does not distribute profits to owners.
Nonprofits must create bylaws to establish the organization's operating agenda as outlined by these rules. Forming a nonprofit organization is like creating a regular corporation in many regards. One of the most notable differences is that nonprofits must apply for tax exemption with the Internal Revenue Service and the state. As a part of this tax exemption status, the 501(c)(3) states that no part of the organization's income can personally benefit anyone. Also, the organization must have a limited liability feature that protects directors, officers and members from personal responsibility for the corporation’s debts and other liabilities. Other things that a nonprofit must do before it begins operation is to appoint directors, choose a business name, hold a board meeting and obtain licenses and permits for incorporation.
The nonprofit organization must have the articles of incorporation as the primary document for its operations. These articles contain the basic structural information about the nonprofit. Information about registered agents, registered office address and corporate membership structure are included with these documents as well. A clause for dedicating its assets to another nonprofit organization (if the organization comes to an end) and tax exemption status are included with the incorporation documents.
A nonprofit's bylaws serve the purpose of showing how the nonprofit operates. They are considered to be the organization's second most important set of documents. They outline the rules and procedures for electing directors, holding meetings and appointing officers. The bylaws also have rules that conform to state laws for corporate governance matters. Nonprofits can create any other type of rules as long as they don’t violate state law on this matter. As a rule of thumb, many nonprofits must make their bylaws conform to state laws to ensure that they keep their tax-exempt status.
Nonprofits can operate in certain capacities, just a like a regular for-profit corporation. They can have bank accounts and own many kinds of productive assets. Income from sales, donations, grants and fund raising are permissible activities that can benefit nonprofit organizations. They can generate and keep passive investments, enter into contracts and even employ staff for their operations. Nonprofits are allowed to conduct business activities that do not jeopardize their tax-exempt status with the Internal Revenue Service.
The rules for nonprofit organizations are set in place so that the nonprofit can carry out its mission statement to the community over incurring a profit. By keeping this rule in mind, many organizations that wish to operate in this manner are able to focus specifically on the primary purpose for starting the nonprofit. Other benefits for nonprofits include exemption from county and personal property taxes, inexpensive advertising rates, and free media public announcements. Contact the National Council of Nonprofits and the Internal Revenue Service in your area to find out more information about starting a nonprofit organization.
- Naitonal Council of Nonprofits: Network of state and regional nonprofit associations
- NOLO: Nonprofit Basics
- NonProfitExpert.com: Nonprofit Law
- Internal Revenue Service (IRS). "Publication 557," Page 3. Accessed Aug. 26, 2020.
- National Center for Charitable Statistics. "The Nonprofit Sector in Brief." Accessed Aug. 26, 2020.
- Internal Revenue Service (IRS). "Publication 526: Charitable Contributions," Page 3. Accessed Aug. 26, 2020.
- Internal Revenue Service (IRS). "Form 1023 and 1023-EZ: Amount of User Fee." Accessed Aug. 26, 2020.
- Harvard Business Review. "Should Your Business Be Nonprofit or For-Profit?" Accessed Aug. 26, 2020.
Steven Miller earned his associate degree in the field of education and is currently continuing his education at Ohio Dominican University. A freelance writer since 2010, Miller enjoys gaining valuable experience and growing as a writer.