Should You Start a Nonprofit Organization?

There are numerous legal, financial, and administrative details required to start a nonprofit organization. A corporate entity must be formed with the appropriate state agency. This requires selecting an available corporate name. An Employer Identification Number is needed from the IRS, which will require some knowledge of anticipated activities and the number of initial employees expected. Bank accounts need to be established with a financial institution. It may be necessary to apply for recognition for tax exemption from the IRS, or in some cases in the state. The application process requires the filing of a lengthy form detailing the activities of the organization, a significant application fee, and several months of waiting for approval. Payroll must be established. A board of directors needs to be formed. Sales tax exemption from the state requires an application procedure. Adequate liability insurance, property insurance, and work comp insurance may all be needed. 

But before considering any of these issues, a preliminary question should be asked: is a nonprofit organization really necessary to accomplish your initial objectives?  

To make this determination, first, consider why you feel the need to start a nonprofit organization. Often when someone wants to accomplish something charitable and meaningful it is difficult to discern how to get started. The challenges of going from “nothing” to “something” can feel overwhelming. Uncertain of where to begin, it is easy to assume that the best way to get started is to form a nonprofit organization.

Sometimes forming a nonprofit entity is exactly the best thing to do to get started. But not always.

In making this determination, ask the further question of what needs to be accomplished now that cannot be accomplished because there is no nonprofit organization in place. For example:

Are there potential donors trying to give charitable donations to the cause, but they cannot do so? Is forming a nonprofit organization now essential to obtaining tax-exempt donor funding?

Is there a need to avoid paying unnecessary federal, state, or local taxes for any pending activity? Will your efforts be taxed unless you have a tax-exempt nonprofit entity in place?

Does anybody need to be employed in the near future?

If the answer to any of these questions is “yes,” then it may be time to incorporate as a nonprofit entity, and in some circumstances seek tax-exempt recognition from the IRS.

But if the answer to these questions is “no,” then it may be best to move forward with doing the desired charitable and meaningful activities and wait until there is a specific need before taking the necessary steps for corporate formation. There are significant costs and numerous steps required to start a nonprofit organization. The expense and effort may be worthwhile in some circumstances, but premature in others.

Seek the advice of an attorney licensed to practice law in your jurisdiction if you are uncertain as to whether you need to form a nonprofit organization to move forward with your initiative.

Contact Clergy Financial Resources to help you with the next steps.

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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

For more information or if you need additional assistance, please use the contact information below.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421-0101 
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com