One of the biggest advantages of forming a nonprofit organization is that it makes you eligible for tax-exempt status.
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If you've filed an application for tax-exempt status and meet IRS eligibility requirements to claim this status, you will tap into a big benefit...once you are granted tax-exempt status.
What's the benefit?
In a nutshell, you will not have to pay any state sales taxes! That can be a big savings for your organization.
To qualify for tax-exempt status, nonprofit incorporation is necessary. The process for incorporation varies widely in each state, but generally requires that bylaws be written and a board of directors elected.
Contact the Secretary of State's office for information on nonprofit incorporation in your state. A small nonprofit incorporation filing fee is usually required.
Once you have filed your articles of incorporation and fulfilled all other state requirements, you can file for tax-exempt status.
Mind you, after you get federal tax exemption, you are still required to pay state taxes. To receive state exemption, you must file with the appropriate state agency. The state, however, will not give an exemption until the federal exemption has been granted.
Nonprofit incorporation can be an attractive option for many businesses that might otherwise choose a for-profit formation.
For example, many day care centers choose to operate as nonprofits, in part to be able to obtain tax-exempt status.
As a refresher, remember that in a nonprofit organization any money that remains after expenses are paid is returned to the support the operations of the nonprofit. There are never any profit dividends per se.
In addition to getting tax-exempt status, there are some other benefits from being a nonprofit.
- Contributions to the center are tax deductible for any donor, whether made by an individual or a foundation.
- Grants are easier to obtain from both private and public sources.
Before deciding to operate as a nonprofit organization, contact a lawyer. Sound legal advice will help you make the right decision.