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Benefits and Tax Implications of a Non-Profit Corporation

By: , dated January 25th, 2013

Every individual who operates a business has the ability to incorporate his or her business in a fashion that permits the best tax benefits. Each type of corporation has a different set of benefits and legal implications, so it is important for an individual to choose a structure that best fits their business requirements. Business owners need to consider factors such as the number of people involved, the tax situation of their business, and what’s at stake if the business incurs heavy losses. An individual or a group that operates a non-profit or charitable organization working for a religious, educational, civil or any other cause that is in public interest may also choose to incorporate. Many prefer to form a non-profit corporation that is usually managed by volunteers or paid positions and operates for non-commercial purposes. From musicians and artists to individuals or groups who are engaged in health, education, and community services, everyone can benefit from a non-profit corporation. The non-profit status of a business is a basic requirement to qualify for funds from government agencies and private foundations. Apart from getting grants, there are other benefits of non-profit corporations.

One of the often-quoted advantages of non-profit corporations involves their tax status. A non-profit corporation can seek exemption from various federal and state income taxes under Section 501(c) of the Internal Revenue Code. This is one reason why non-profit corporations are also referred to as 501(c) corporations. This kind of tax rebate not only covers the income generated by the corporation, but also applies to all the donations it receives. It is therefore a beneficial situation for both the corporation and its donors who get tax exemption for their contributions.

The term “non-profit” does not imply that a corporation with this status cannot make money. There are, however, a number of restrictions on how such a corporation can use earnings. Congress and the Internal Revenue Service have laid down certain parameters that an organization must follow in order to qualify as a nonprofit corporation. One major parameter states that profits cannot be distributed among its directors, officers, or members that are responsible for managing the affairs of the organization. While shareholders of for-profit corporations are entitled to get stock in exchange for their capital investments, and thus receive a return on their investment by way of dividends. The organization can use its tax free profits to cover operating expenses, such paying salaries. Due to its exempt status, filing of regular tax returns may not be required if the corporation’s gross annual income remains below $25,000. Receiving donated goods worth over $5000 and disposal of donated goods worth over $2500 would require filing special purpose tax returns.

All assets of a non-profit corporation are required to be dedicated to the tax exempted purpose for which it is formed. This implies that in case of its dissolution the assets need to be distributed to some other tax-exempt 501(c) organization. Failure to comply by these requirements could result in the organization losing its tax-exempt status. All activities of the corporation must be strictly related to nonprofit purposes. Organizations that come under the tax-exempt category include labor organizations, business leagues, real-estate.

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