How to Create a Nonprofit Corporation - dummies

How to Create a Nonprofit Corporation

By Stan Hutton, Frances Phillips

In almost all cases, the first legal step in creating a nonprofit organization is forming a corporation. A corporation is an entity or an organization that has legal standing. It’s established by a group of individuals — the incorporators — under the laws of the state in which it’s formed.

Exceptions do exist. In the United States, for example, associations, trusts, and sometimes limited liability companies can operate as tax-exempt nonprofit organizations. And charitable groups with less than $5,000 in annual revenues, as well as churches, aren’t required to apply for tax exemption.

One advantage of creating a corporation is that the individuals who govern and work for it are separate from the abstract entity they create. Although board members can be liable for the corporation’s actions if they don’t exercise their duties and responsibilities carefully, in most cases, corporations protect individuals from personal liability.

The corporation you create goes on living after you decide to do something else or after your death. Corporations can be closed or dissolved, but you must take legal steps to do so. You can’t just take down your shingle and walk away.

Look to your state law

In the United States, corporations are created and regulated under the laws of the state in which they’re formed. Although there are more similarities than differences, you do need to create your nonprofit so that it conforms to the peculiarities of your state. Some states, for example, require a minimum of three members to belong to a board of directors; others require only one.

Usually, the secretary of state’s office handles incorporations. Some states have an incorporation package that includes the forms you need to file. You also can find state contact information on the IRS website.

Consider your corporation’s governing documents

Think of a corporation as a tiny government with a constitution and laws. To set down the rules under which the organization will operate, you need to prepare the following important documents:

  • Articles of incorporation: The articles of incorporation make up the document that creates the organization. It names the organization and describes its reason for existence. In the case of a nonprofit corporation, it specifies that the corporation won’t be used to create profit for its directors. The articles are signed by the corporation’s incorporators, usually three people, who may or may not end up being directors of the organization.

  • Bylaws: A corporation’s bylaws specify how directors are elected and the length of terms, the officers and their duties, the number of meetings to be held, who is and isn’t a member of the corporation, how many members or directors are required to be in attendance for a quorum to be present, the rules for director attendance at board meetings, and the process through which bylaws may be amended.

    They also may list the standing committees of the board and grant or limit particular powers of the trustees.

Decide whether to have members in your corporation

Corporations may have members. In fact, they may even have different classes of members. Generally speaking, though, having members in your corporation adds additional responsibilities to the governance of the organization. If you have members, for instance, you need to have membership meetings, probably at least one per year, and the members will be involved in choosing directors for the organization.

Depending on state law, you usually have the option to create membership conditions in either the articles or the bylaws. If you have a choice, add these conditions to the bylaws, which are easier to amend than the articles of incorporation.

It’s not a good idea to have members unless you have a very good reason to do so. However, you may want to get as many people involved in your organization as possible, and having members is one way to achieve this goal.

Many nonprofit organizations have “members,” who get membership cards and special rates on admissions to performances or exhibits. You’re free to start a membership program of this type without amending your bylaws or your articles of incorporation.

Choose your corporation’s name

Choosing a name for your new corporation may be one of the most important things you do as you set it up. A nonprofit’s name is a little like a mission statement. Like your mission statement, your organization’s name needs to suggest the types of programs and services you offer and the people you serve.

So if your programs provide home health services to people over 65, don’t name your nonprofit something generic like Services for the People. Also stay away from names that are so abstract that they have no meaning at all. A name like the Reenergizing Society prompts more questions than it answers. Use concrete, descriptive terms.

Check the acronym that results from your organization’s name. The Associated Workers for Union Labor, for example, isn’t a title you want to abbreviate on your letterhead.

Also be careful that you don’t select a name that’s easily confused with that of another organization. Before you decide on a name, do an Internet search to see whether any other companies or organizations already have that name. The state agency that accepts your application for incorporation has procedures for ensuring that two corporations in your state don’t end up with exactly the same name.

However, these procedures can’t help you uncover organizations with the same name in other states or with names that are similar and could be confused with your name. To help ensure that you have a distinctive name, you may want to include the name of the city or region where your organization is located — Tap Dancers of Happy Valley, for example.

You also can search the Trademark Electronic Search System (TESS) found to determine whether the name you have chosen is trademarked by another organization. If you want, you can register your own trademark with the federal government and with the state in which you incorporate.