Nonprofit organizations provide a vast array of necessary goods and services to local citizens. Because of the tax-exempt status typically given a nonprofit, requirements are imposed by federal, state and local governments to ensure these organizations are properly organized and licensed. This protects the public from potential misrepresentation by unscrupulous individuals.
Establishing a Nonprofit
Nonprofit organizations should be established to capitalize on IRS and state laws regarding tax exemption. Generally, to be tax-exempt an organization must be organized and operated exclusively for exempt purposes set forth in IRS regulations. These purposes include:
- other pursuits
In addition, the entity 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. Nonprofits are often incorporated to firmly establish their tax-exempt status.
Federal Employer Identification Number
To meet federal requirements, all nonprofit organizations need to obtain a federal tax number, also referred to an Employer Identification Number, as soon as possible. This is a number the federal government and many state and local government agencies use for records rather than one person's social security number. This filing is normally completed during the incorporation process. No business license is required for nonprofits at the federal government level.
A nonprofit is typically incorporated in its home state as a separate and unique legal entity. Then, a business license is obtained to allow a nonprofit to conduct business in the state. The nonprofit must first incorporate before obtaining a business license. The license facilitates the ability to collect and remit certain taxes on behalf of the state, such as employment and sales taxes. State business licenses are generally valid for a specific time frame before they need renewal.
A local business license, usually issued by a city or county and often referred to as a tax registration certificate, allows a nonprofit to operate locally. If the local jurisdiction has its own sales tax system, this certificate will act as authorization to collect such taxes on behalf of the local government and forward that money on an established schedule. Additionally, fundraising activities are typically governed by local or state statute.