The tax-exempt status of a non-profit is quite alluring. In addition, non-profits are eligible for a variety of government grants and funding. Like many business owners, you may have wondered whether your firm could reap the benefits of being a non-profit. After all, who wouldn't like to pay less for postage? However, converting an existing venture to not for profit status is not as easy as just saying goodbye to your tax bills.
Is your business even eligible?
The first thing to look at is whether your business could even qualify as a non-profit organization. The most common form of non-profit is known as a 501(c)(3) charitable organization; when these organizations receive donations, the donors can claim deductions on their income taxes. In order to become a 501(c)(3), a company must be dedicated to a charitable purpose or serving the public good. For example, educational ventures, religious organizations and public assistance groups (that feed, clothe, house or otherwise serve those in need) all qualify. The group must benefit the public, as opposed to a private group. A 501(c)(3) must also be incorporated.
There are additional types of non-profits; groups such as business leagues, social clubs, and labor and agricultural organizations may be able to form tax exempt non-profits. The IRS offers details on groups that are eligible at: http://www.irs.gov/charities/nonprofits/content/0,,id=132157,00.html.
So, if you sell luxury Alpaca mittens or make gourmet chocolates, your tax-free dream is probably just that... a dream. On the other hand, if you have been making software to help underprivileged children attain literacy and you want to start giving it away for free, you should keep reading...
So, what would I need to do to convert my business?
Start with your business plan. Make sure you have thoroughly outlined not only your goals, but what it is about your business that makes it a better non-profit than a for profit venture; include information on your mission, pursuits, where your company will get income and how it will be allocated. You will also need to develop bylaws by which your non-profit will abide.
Are you already incorporated? Since incorporation is necessary for non-profit status, you will need to factor in the costs of incorporation when you weigh your choices. Among the decisions to make include what state in which to incorporate, since the laws for corporations vary dramatically. If you are already incorporated, you will need to change your corporation status within your state to allow you to seek non-profit status; make sure to check your state laws for details. Some states require pre-approvals before non-profit corporate filings. As a corporation, you will be required to hold regular board meetings.
Next, you will have to do paperwork to change your business' filing status. The IRS will want information about the changes in your organization that are prompting the change (other than your clever idea that you could avoid paying taxes). Have you grown to where you feel compelled to serve your community at large? Have you discovered a new educational method you must share with schools? Consider checking with non-profit attorneys in your state as to whether your business will legally quality.
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