Incorporating as a non-profit 501(c)3 organization provides an organization considerable tax benefits, but what are the drawbacks? Below are some pros and cons for filing for non-profit status.
Pros for incorporating as a non-profit 501(c)3 organization
- Pay no federal, state, or local taxes
- Qualify for special grants and government funding, even lower postage rates
- Encourage donation by providing donors with tax deduction
- Shield owners and directors from liability through status as a corporation
- Be eligible for discounted advertising rates, including possible free tv and radio public service announcements (PSA's)
Cons of incorporating as a non-profit 501(c)3 organization
- Lengthier, more-involved application and qualification process that requires payment of multiple fees and costs
- Must comply with numerous regulatory requirements, including submitting annual reports to federal and state agencies
- Can only pay managers reasonable salaries, can't divide profits equally.
- Can't pay Board of Directors
- On dissolution, must distribute assets to other non-profits
If you are debating between filing as a corporation or a non-profit 501(c)3 organization, take a moment to answer the questions below. They will help frame your organization's priorities and help you determine whether non-profit organization status or for-profit incorporation is the better fit.
Does your organization prefer flexibility over cost benefits?
Will your organization be more successful in securing funding by being able to offer a tax exemption for donations or will investors be more drawn by potential returns on investment?
Will your organization be able to attract high-quality leadership with any limits on compensation?
Despite the time and paperwork involved in filing as a 501(c)3 non-profit, will the status enable your organization to focus more time and resources on your mission or cause?
If you have additional questions or concerns about whether non-profit status is right for your organization, consult with an attorney who specializes in non-profit 501(c)3 incorporation.
- What are the benefits and drawbacks of nonprofit, tax-exempt status? (FindLaw)
- Before You Incorporate as a Nonprofit - Pros & Cons (About.com)
- The pros and cons of starting a non-profit organization (Examiner.com)
- Business Formation (provided by The Law Offices of Lawrence Brown)
- Business & Commercial Law FAQ (provided by The Law Firm of Peters & Wasilefski)