Nonprofits: Unincorporated vs. incorporated

If you've formed an unincorporated association for the purpose of doing public good, incorporating as a nonprofit corporation or applying for IRS tax-exempt status might be a good idea.

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by Belle Wong, J.D.
updated January 31, 2023 ·  3min read

Chances are you've probably been involved in an unincorporated nonprofit association at some point in your life. Such informal organizations revolve around activities such as raising funds for your local library or assisting with disaster relief. If the unincorporated association you've formed has been working out well, it might be time to turn it into a nonprofit corporation.

Unincorporated nonprofit association

Whenever two or more people decide to work together to accomplish a common purpose, they've formed an unincorporated association. If that purpose is to generate a profit, then the unincorporated association they've formed is a partnership or a joint venture. This, then, is the definition of an unincorporated association: two or more people coming together to work toward a common goal.

And, as more commonly happens, if that common purpose is to accomplish some social or public good, they have formed an unincorporated nonprofit association. In both cases, no legal paperwork needs to be drawn up or filed for the organization to be considered an unincorporated association.

Differences from a nonprofit corporation

The term "unincorporated association" is commonly used to refer to a nonprofit structure. It's fairly easy to form an unincorporated nonprofit association, although there may also be state-specific regulations you should be aware of.

The nonprofit corporation, however, is different from an unincorporated nonprofit association because, as its name suggests, it is a corporation formed with the primary goal of benefiting the public, as opposed to being just an association of people. The nonprofit corporation's goal, known as a public purpose, generally involves a charitable, religious, or educational purpose.

Forming a nonprofit corporation involves more paperwork and ongoing maintenance to comply with regulatory rules. The benefits of incorporating as a nonprofit corporation, which stem from its legal characterization as a separate entity, include:

  • Liability protection. You and your fellow association members are not exposed to the potential personal liability that you would have if your group continued to function as an unincorporated association. Even though some states, such as California, provide a certain amount of liability protection for unincorporated association members, it's still not as strong as the liability protection obtained through incorporation.
  • Contracting with third parties. A nonprofit corporation is able to contract directly with suppliers, financial institutions, and other organizations or individuals. With an unincorporated association, one or more of the association's members must personally enter into such contracts.

IRS Tax-Exempt Status

Even though it's not a corporate entity, an unincorporated association might still qualify for section 501(c)(3) tax-exempt status with the Internal Revenue Service (IRS) if its purposes fall within the IRS's exempt purposes. Note that your exempt purpose or purposes should be outlined in your association's articles of association and not merely in your unincorporated association bylaws or rules. You also need your articles of association to file the Application for Recognition of Exemption (Form 1023).

Unincorporated associations with gross revenues less than $5,000 do not need to file Form 1023. However, you may find it easier to get contributions if you are able to show potential donors a section 501(c)(3) determination letter from the IRS, as such contributions are tax-deductible for the donor.

Nonprofit corporations need to meet the same criteria in order to qualify for tax-exempt status and should also file Form 1023 to apply for this status, unless the corporation has gross revenues of less than $5,000.

IRS filing requirements for unincorporated associations

Once your unincorporated association receives tax-exempt status, you need to comply with the IRS's annual filing requirements by filing one of the Form 990 series forms. The specific Form 990 your association must file generally depends on its filing threshold, although some exceptions might apply:

  • If your association has gross receipts of $50,000 or less, the proper form to file is the Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990EZ (Form 990-N).
  • If your association has gross receipts of less than $200,000 and assets totaling less than $500,000, the proper form to file is the Short Form Return of Organization Exempt From Income Tax (Form 990EZ) or the Return of Organization Exempt From Income Tax (Form 990).
  • If your association has gross receipts of $200,000 or more and total assets of $500,000 or more, the proper form to file is the Return of Organization Exempt From Income Tax (Form 990).

If you are working with a group to raise funds for some form of public good, you've probably formed an unincorporated nonprofit association. Whether or not you incorporate your association as a nonprofit corporation, if your association relies on donations, applying to the IRS for tax-exempt status is something that should be considered.

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Belle Wong, J.D.

About the Author

Belle Wong, J.D.

Belle Wong, is a freelance writer specializing in small business, personal finance, banking, and tech/SAAS. She spends h… Read more

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