Business Plan Consulting

Thursday, January 26

SHOULD YOU FORM A NOT-FOR-PROFIT ENTITY?

Question:
I have developed a unique educational program to assist children with learning disabilities.  What type of entity should I start my program with?  I have very little startup capital.  I was told that I should incorporate as a not-for-profit company as opposed to a for profit company.  If I do, how would I be rewarded?  What procedure do I have to follow?
 Answer:




First and foremost, your reward, as founder, of a public-benefit program is the meeting of your mission which, in your case, is to develop a unique educational program to assist children with learning disabilities.  If your program qualifies as a not-for-profit entity and you subsequently qualify for tax-exempt status, you would be able to apply for grants and donations to generate the capital you would need to operate your program.   You would be permitted to hire staff who may receive fair salaries for their efforts, through payroll based on industry benchmarks, but would not be entitled to take any remaining net profits.  The income generated must be used for the public benefit intended. Since you do not have adequate capital to promote your program for profit, choosing the not-for-profit route is worthy of consideration.

A not-for-profit corporation is simply a corporation that is formed pursuant to state Not for Profit law. The Department of State and State Attorney General's recommends that you consult an attorney and an accountant regarding the formation of a not-for-profit corporation. Generally, the corporation must be formed for some religious, charitable, educational, literary or scientific purpose to be considered eligible for becoming federally tax-exempt under Internal Revenue Code Section 501(c)(3).  Not-for-profit corporations, granted tax-exempt status under the Internal Revenue Code Section 501(c)(3) are also allowed to apply for exempt status from sales tax on the state level for its purchases if the state permits. While a standard business corporation is designed to benefit and generate a profit for its shareholders as well as pay its respective taxes on its profits, not-for-profits are mission-driven and are obligated to use their revenue to cover their expenditures, thus, not having a profit motive in order to maintain its tax exempt status.  The award to the founder is that the not-for-profit successfully goes on to meet its original mission and goals.

The first step is to file not-for-profit articles of incorporation with the proper state agency. It is important that the articles contain the required clauses, under the respective state not for profit law, to make sure your articles will qualify for tax-exempt status.

 After the not-for-profit articles are filed, tax-exempt status must be applied for at both the federal and state levels. To apply at the federal level, a timely filing of Internal Revenue Service form 1023 (Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code) or form 1024 (Application for Recognition of Exemption Under Section 501(a) of the Internal Revenue Code) must be made. To determine what forms need to be filed on the federal and state level, contact an accountant or tax attorney who specializes in this area.
 The corporation must comply with corporate formalities and hold annual meetings of directors (generally not less than three) and members. Bylaws and Conflict of Interest Policies must be adopted for the corporation. Documents that help you comply with these corporate formalities are contained in your corporate kit, and, on the respective state websites.

  

1 comment:

  1. It depends on your motive in organizing the agency. You have to have a mission to the community.

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