When starting a nonprofit, one of the first decisions is to determine whether to incorporate.
Note that nonprofit incorporation is not the same as applying for a tax-exempt status. Both nonprofits and for-profits can incorporate. This outline discusses the basics of the nonprofit incorporation process and provides answers to common questions.
What is a nonprofit corporation?
A corporation is a legal entity that exists to perpetuity until it is dissolved. It is a ‘fictitious person’, separate from its managers or governors, and is usually given the same rights and obligations as natural persons. A nonprofit corporation is able to conduct charitable, educational, or scientific activities; it can enter into contracts; it can incur debts; it can hire employees who are eligible for fringe benefits; and it is legally liable for its actions.
Do we have to incorporate?
You are not obligated to incorporate even if you are a tax-exempt nonprofit. Unincorporated associations do exist. Incorporation may not be necessary if you do not raise funds or solicit deductible donations, and you function without generating surplus.
Why is it a good idea to incorporate?
The main benefit of being incorporated is the limited liability that it provides for those managing or governing the organization. All the debts and obligations are in the name of the corporation. As long as the managers and board members act reasonably, with care, and put the benefit of the organization ahead of their personal gains, they may be absolved from personal liability. Incorporation is the first step in risk management. Secondly, because the corporation status is not affected by change of personnel, it functions in a relatively stable environment. This simplifies business with contractors, facilitates application for tax-exemption, and funders tend to prefer working with incorporated nonprofits.
How to incorporate
- File Articles of Incorporation: To become incorporated, a nonprofit needs to draft a legal document called ‘Articles of Incorporation,’ which is filed with the state. (See below for what these articles contain.) The state agency that handles registrations usually can provide a form for the purpose. Check with the corporations division or business bureau at the office of your Secretary of State. Before filing it, you may want to have a lawyer check its contents to make sure you are in compliance with all the state laws that affect corporations. In the end, you will receive a ‘certificate of incorporation,’ which is the legal proof of being incorporated.
- Reserve your corporate name: You also want to reserve a name for your organization. This assures that no other organization can incorporate under the same name in your state. If you are going to operate beyond the state borders, a national name search may be necessary. Most states have regulations for appropriate names. You also want to ensure that your organization has a distinctive and descriptive name to make it unique and to avoid confusion with other organizations. If your corporate name is closely associated with your products or services, you may want to protect it additionally by applying for a federal trademark with the Patent and Trademark Office in Washington, DC.
- Check the state laws: To fill all the above-mentioned legal requirements, you need to investigate your state’s statutes concerning nonprofit corporations. State laws may regulate the number of incorporators you need and limit your name selection, but they also have a lot to say about how you draft your bylaws and carry out your board meetings.
Articles of Incorporation
Your articles are a binding legal document. The content requirements vary from state to state and, as a general rule, you should include in them only what the law requires. Your bylaws, which are more easily amended, will handle the more detailed regulations to govern your organization. Normally you would include the following items in your document: name of the corporation; its specific purpose (be brief and broad to allow for future evolution but clearly indicate its tax-exempt focus); duration of its existence (often perpetuity); location of its office; number, names and addresses of the initial board of directors; whether this is a membership organization; and provisions for distribution of assets when the corporation is dissolved.
Where should you incorporate?
The state in which your organization is incorporated, considers you a ‘domestic’ corporation. All other states deal with you as a ‘foreign’ corporation. If you transact business outside of your own state, you need to register, qualify, and pay a fee. Because of the fees and applications involved, generally there are few advantages to incorporate in a different state than where you normally carry on your business. If you are a multi-state operation, you probably want to weigh the tax, legal, and operational advantages between the various choices. In some very specific cases, it may be important to compare the state regulations closely and choose a state that provides you with the necessary flexibility.
101 Resource | Last updated: June 21, 2016