The Benefits of Forming a Non-Profit

If you have a specific societal problem you would like to address, such as a charitable cause, educational issue, or even helping unwanted dogs and cats find their forever homes, you may be thinking about starting a non-profit organization. While you will be able to do much good, it is important you know all the major steps involved in your project. Though certain disadvantages exist, just as there are with any venture, the pros outweigh the cons. Now that you know what you want to do, here are some of the biggest benefits to forming a non-profit.

Federal Tax Exemption

Arguably the greatest benefit of all, your non-profit organization will be given a federal tax exemption, often referred to as 501(c)3 tax code status. With this, your organization won't have to pay any corporate or income tax, since you won't be reporting any profits. However, remember that you will have to continue filing tax returns with the IRS to maintain this exemption, and you may be subject to periodic audits so the IRS can verify your non-profit is playing by the rules.

Tax Deductions

Along with the federal tax exemption as well as state and local tax exemptions, your organization will also be able to offer others tax deductions for their contributions. Whether they donate money or items, giving them a receipt will let them lower the amount of taxes they will be required to pay. As a result, this gives people more incentive to donate to your organization, making it a win-win for everyone.

Tax Credits

If you really want to take advantage of the tax benefits that are associated with non-profits, make sure you learn all you can about the many tax credits that are made available to numerous organizations just like yours. While the majority of these credits will come from federal, state, and local governments, you may even be eligible for some offered by private organizations, so keep this in mind as well. The credits, which are based on how much your organization would owe in taxes for a particular year, then allow your tax amount to be adjusted to what is usually a much lower amount.

State and Local Tax Exemptions

As mentioned earlier, most non-profits are also eligible for state and local tax exemptions that can work together with federal exemptions to save your organization thousands of dollars each year. Since states are always looking for ways to incentivize local organizations and citizens to help solve societal problems, these exemptions often make a tremendous impact.

Access to Grants

Since it can always be a challenge for non-profits to gain the money they need for their causes, taking advantage of the many grants that are available can make a world of difference in a hurry. No matter the focus of your non-profit, there is a good chance you can find many grants that can give you much-needed funding.

Postal Service Discounts

As any non-profit organization knows, mailing costs can often be much higher than anticipated. To help with this, the U.S. Postal Service offers generous discounts on bulk mail rates for tax-exempt non-profits, meaning you can send out newsletters, donation requests, and more while saving a substantial amount of money.

Credibility

If you try to make changes to certain types of problems in your community or elsewhere, having actually formed a non-profit can give you the credibility needed to convince people to donate money to your cause. Due to the tax deductions people can take by giving to charitable causes, actually obtaining non-profit status will increase the chances your group will be able to accomplish its goals.

Strict Management Oversight

While you've already read about many of the biggest benefits to forming a non-profit, you should also be aware of some of the biggest disadvantages, one of which is very strict management oversight. Under U.S. law, non-profit statutes contain strict rules regarding how a non-profit is to be managed. Thus, depending on the type of non-profit you form, its location, and other factors, you may be required to have a board of directors, conduct regular public meetings, take minutes of all meetings and more.

Regulatory Compliance

If there is one thing the leaders of most non-profits hate dealing with on a regular basis, it is the ongoing need to be in full compliance with ever-changing regulations from local, state, and federal agencies. Should you fail to stay in compliance, it is possible your organization could lose its non-profit status, forcing a shutdown. Therefore, you should pay close attention to what is required of your organization, which can include filing annual reports, maintaining records, and drafting bylaws.

Political Campaigning or Lobbying

Even if your non-profit organization is passionate about a certain issue, it is against the law for your non-profit to participate in lobbying or political campaigning of any kind. Since you have tax-exempt status, actively engaging in these activities will be a quick way to bring plenty of legal trouble your way and lose that all-important tax exempt status.

High Levels of Expenses

Last but not least, always plan on having more expenses that you anticipated when running a non-profit organization. For starters, you will have filing fees to pay to the state where your non-profit will be located. In addition, you will probably also be expected to pay annual fees to the state. However, by making yourself aware of these expenses at the time when your non-profit is formed, you can plan your budget accordingly.

While forming a non-profit will allow you and others to bring about significant and positive changes in the lives of others, it can also be quite a challenge keeping up with the rules and regulations. But with so many tax benefits that are ready for the taking each year, it is well worth the effort. After all, once you do your homework and have everything up and running, you will be able to get up each day and know you are changing the world for the better. Be sure to consult with your CPA to ensure that you set up your non-profit the correct way.