What is a Non-Profit?

What qualifies an entity for non-profit status is its dedication to the greater good rather than monetary gain. This is sometimes referred to as a “charitable purpose”, but the Internal Revenue Code refers to it as an “exempt purpose”. The exempt purposes set forth in section 501(c)(3) of the Internal Revenue Code are as follows: charitable, religious, education, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to animals or children. According to the IRS, “the term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed or the underprivileged; the advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency”.

Advantages of a 501(c)(3) Nonprofit

The primary advantage of forming a non-profit entity is that any revenues generated by the organization are exempt from federal taxation, meaning that more monies can be directed to its charitable purpose. Employees of non-profit entities can be paid a salary, bonuses and commissions, and these wages are taxed to the employee as income, but the entity itself is tax exempt. Another advantage to having tax exempt status is that generally any monies contributed to the organization are tax deductible to the giver, making fundraising easier.

Applying for Nonprofit Status

Once a suitable charitable purpose has been selected, an entity seeking tax exempt status must make application to the IRS using Form 1023. There is an application fee which is determined by the gross revenues of the business, and supporting documentation must be provided with the application. Should the IRS need any further information in order to make a determination of whether or not to approve tax exempt status for the organization, this must be provided as a supplement to the application.

Prior to making application for tax exempt status, however, an organization should first determine what form of corporate entity it should take, and this is where the advice of a professional is crucial. Certain types of entities, depending upon their ownership, are ineligible for tax exempt status. We at P.K. Hammar Legal, P.C. are here to help guide you through the process of obtaining non-profit status for your organization. Why risk making a costly misstep when experienced, professional counsel is a phone call away?

Contact us today at (301) 657-7590 for a free consultation.

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