Legal Structures for Nonprofit Businesses - dummies

Legal Structures for Nonprofit Businesses

By Steven D. Peterson, Peter E. Jaret, Barbara Findlay Schenck

As you organize your nonprofit venture, you want to choose a legal structure appropriate for your situation. The United States alone has more than 1.5 million nonprofit organizations, ranging from small groups like the Mentor Me Memphis to one of the largest charitable foundations of them all, the Bill and Melinda Gates Foundation, endowed with more than $30 billion.

The following represent your basic options for legal structure:

  • Informal nonprofits: As the name implies, these organizations are loose-knit groups of like-minded people who get together for activities or to be of service to the community. Examples include local book clubs, self-help support groups, or graffiti cleanup patrols. Informal nonprofits have no legal structure and typically raise and manage only small sums of money. They aren’t big enough to fall under the watchful eye of the IRS.

  • Nonprofit corporations: Incorporation allows a nonprofit organization to protect its directors and staff from certain types of liability, similar to the protection offered to for-profit companies. Incorporation also ensures that the organization can continue its activities even when the founding members are gone. To get the details on incorporation in your state, check with the office of your Secretary of State, Division of Corporations, or Attorney General.

  • Tax-exempt nonprofits: Nonprofit corporations with charitable, educational, scientific, religious, or cultural purposes can file for tax-exempt status under section 501 of the Internal Revenue Service Code. The major types of tax-exempt organizations include

    • Charitable organizations (religious, educational, scientific, and literary organizations, for example)

    • Social welfare organizations (civic leagues and community groups)

    • Labor and agricultural organizations (labor unions and farm bureaus)

    • Business leagues (trade associations and chambers of commerce)

    • Social clubs (country clubs, fraternities, and sororities)

    • Fraternal organizations (lodges and other clubs)

    • Veterans’ organizations (armed forces groups)

    • Employees’ associations (employee-benefit groups)

    • Political organizations (campaign committees, political parties, and political action committees [PACs])

  • Qualified nonprofits: Donations to qualified nonprofits may be tax deductible — a distinction that can matter a great deal to contributors. Qualified organizations include religious, educational, scientific, and literary groups, as well as child and animal welfare organizations, certain veterans’ organizations, fraternal societies, and more.

For information on whether your organization qualifies for tax-exempt status, check out IRS Publication 557. For a current list of qualified nonprofits, look at IRS Publication 78. Both publications are available on the IRS website.