Why You Should Incorporate Your Nonprofit Organization
What is a nonprofit organization?
A nonprofit (or not for profit) organization is exactly what its name implies – it is an entity that uses any surplus revenues it generates in order to achieve certain goals, rather than as profits to be distributed among the shareholders. Under the laws of the United States, Canada, the UK, Australia and numerous other countries, a nonprofit organization is allowed to earn profit, but those profits must be used to further the goals of the organization, and not paid out in dividends to its members.
A nonprofit corporation can be a charity, a volunteer service organization, an educational institution, a medical and/or research facility, a church or religious association, a museum, a club, a sports association (in certain circumstances) or a society incorporated for a specified community purpose. In many countries, nonprofit organizations can apply to be exempted from paying income tax and certain other taxes (such as sales tax). In Canada, a nonprofit corporation must apply for charitable status in order to be tax-exempt and to issue tax deductible receipts to donors. In the United States, you must file an application with the Internal Revenue Service for exempt status.
What form can the organization take?
Each country has its own laws governing the legal structure and organization of nonprofits. For instance, in the United States a nonprofit can be set up as a corporation, a trust or an association. The entity may be run by the membership or by the board only, in which case the board of directors or trustees is in control and the power of the members is limited to those delegated by the board.
Canadian law allows for both incorporated and unincorporated nonprofit organizations, as well as a variety of charities, including public and private foundations. Charities must spend a certain percentage of their assets to maintain their charitable status, and they are not allowed to engage in political activities.
Do we need to incorporate?
It’s not necessary for a nonprofit organization to incorporate. Determining whether or not incorporation is the right choice for your organization depends upon its activities and the nature of the organization. But there are some advantages to incorporating. As a corporation, the organization will have legal status as a separate entity which means it will have all the rights, obligations, duties and freedoms that a natural person has under the law. Members' liability is limited which means they will not be personally liable and cannot be sued for the debts of the corporation. A corporation can own its own property, collect outstanding debts, start a lawsuit, open bank accounts, borrow money, and make investments in its own right.
What is required to incorporate?
Depending upon where the organization is based, you will require between 3 and 5 incorporators in order to incorporate a nonprofit corporation. Some or all of the incorporators will undoubtedly form the initial board and will do the work necessary to get the organization up and running, so they should be prepared for a lengthy commitment. Don’t kid yourself – this can take a long time and it can be very hard work. And remember, at the outset nobody’s getting paid either – you’re doing it because it’s for something you truly believe in.
You will need to make sure that the name you propose to use for the organization is available. Do a search with the appropriate government department (in the US, this is usually the Secretary of State, Division of Corporations) to ensure that no one else has registered the same, or a substantially similar, name. While you’re at it, find out what all of your incorporation fees will be, including the fees for reserving or certifying the name.
Prepare and file the Articles of Incorporation. In almost all cases, you can find a free downloadable form online, and often you can complete and file the form online as well. If you’re filing by mail or in person, be sure to include an extra copy of the Articles for certification, along with your letter of transmittal or instructions, and the required filing fees. Canadian nonprofits that are seeking charitable status must ensure that the Articles contain the required clauses for a charity. Check with Canada Customs and Revenue Agency for the current requirements, and to find out how long it will take for your application to be processed.
Once we have incorporated, what do we do?
Minute Book. Once the incorporation is complete, you will need to set up a corporate minute book in which all of the incorporation documents and corporate records (minutes, resolutions, by-laws, etc.) will be kept. These are readily available from office supply stores and registry offices. The minute book will contain a standard set of by-laws, minutes of the initial incorporator’s meeting, minutes of the first meeting of members and the first meeting of directors. These should all be completed and signed as each of the meetings is held. A pre-packaged minute book should also contain a Certificate of Membership form.
Membership Certificates. The organization must issue a Certificate of Membership to each of the members, and a copy must be kept in the minute book. You will need to find out what the legal requirements are in your state or province regarding annual meetings of members and directors, annual filings, and filing fees.
Charitable Status. If the organization has applied for charitable status, there will be additional ongoing requirements to be met in order to maintain that status. It’s a good idea to obtain a copy of the laws and regulations that govern nonprofit organizations in your area. Many of these are available online and can be downloaded for free.
Tax Numbers. If the corporation will be collecting sales tax, you will need a tax number. Check with the State tax department, or in Canada with the CRA, to find out if the organization will be exempt from state sales tax or GST. If the organization will be hiring employees, it will also need to obtain a federal tax number.