What is a Nonprofit - NC Business Blog

A nonprofit corporation is a separate legal entity in North Carolina. You can set them up for a wide variety of purposes. Most commonly, people think of charitable organizations as nonprofits. However, that is not their sole purpose.

Nonprofit Law

The North Carolina Nonprofit Corporation Act governs nonprofits in North Carolina. That is pretty obvious, right? This Act lays out the law around forming, maintaining, and running these types of organizations.

To form a nonprofit, you need to file articles of incorporation just like if you were forming any corporation. However, the articles for nonprofit corporations are unique to them. Fortunately, the Secretary of State provides standard form articles. In those articles, you don’t need to specify a purpose unless you’re forming a nonprofit for a charitable purpose.

Nonprofit Taxation

Inappropriately named, nonprofits can have a profit. What they can’t have is profit allocated to the owners or shareholders of the company. They also cannot have profit that is derived from unrelated business income. For example, if your nonprofit is intending to provide meals for low income individuals, and you open up a retail store that sells apparel, you might be subject to tax on the retail proceeds. However, this is a complicated area of tax law.

Purposes

You can setup a nonprofit for a wide variety of reasons. However, since you don’t legally own a nonprofit, your purpose cannot rely on private ownership. You also cannot earn income as an “owner” through dividends, capital gains, or sale of the organization.

Often times, nonprofits are setup for charitable purposes or membership-based organizations.

501c3

One of the main reasons people form nonprofits is to gain 501(c)(3) recognition through the IRS. This 501(c)(3) recognition gives the ability for donors to deduct their donations from their individual taxes as well as opening up the door for some grants.

In order to qualify as a 501(c)(3), you must fit into one of the categories and file the Form 1023 application with the IRS.

Conclusion

Nonprofits are an option for a lot of companies. However, they are not privately owned. This eliminates the ability to sell your business in the future. On the other hand, you open your door to grants and donations that for-profit businesses wouldn’t qualify for.

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Managing Attorney , Law Plus Plus

Richard is the managing attorney for Law Plus Plus, a local small business law firm. As managing attorney, he helps small businesses and nonprofits startup, creating the contracts, and navigate the legal needs of businesses. Some of his practice areas include: corporate, contract, mergers & acquisitions, corporate litigation, and estate planning.

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