Our organization work with many organizations that want to establish themselves as non-profits. This can offer financial and legal benefits, but forming a non-profit organization can also limit what your business and cannot do. By understanding exactly what makes a non-profit organization a non-profit, you can decide whether you want to pursue this type of structure.
The Benefits of Forming a Non-Profit Organization
First, let’s look at some of the reasons people want to form non-profit organizations. There are plenty of benefits. You should know about them.
- Taxes. Non-profit organizations pay lower taxes than most for-profit businesses. That’s because they register as charity organizations that don’t have to pay the government as much money. Employees still have to pay their fair share, but the non-profit corporation benefits from a significant tax reduction.
- Non-profit organizations often qualify for grants, especially government grants that other companies cannot apply for.
- Individuals and other organizations that donate to non-profit organizations lower their tax burdens (the specific amount depends on how much they donate). This can encourage people to give money to charities, community support providers, and other non-profits that don’t make money by selling products or services.
- By forming a non-profit corporation, board members and other leaders in the organization are protected from some legal and financial responsibility.
Understand the Limitations of a Non-Profit Organization
There are some drawbacks to forming a non-profit instead of a for-profit organization. Otherwise, why would anyone form anything other than non-profits?
- The biggest obstacle is apparent in the name. Non-profits cannot generate profits that get shared amongst owners and investors. When non-profits have surplus money, they have to invest it in the organization or use it to improve the community in some way.
That doesn’t mean non-profits cannot keep money in the bank. Non-profits have long-term goals and expenses, just like for-profit businesses, so they need to accumulate money that can help them reach those goals. They cannot, however, use surplus money for personal financial gain. The money does not belong to anyone in particular. It belongs to the organization. No individual or group of individuals can profit directly from those funds.
- Non-profit organization also have to refrain from participating in certain activities. For instance, non-profits cannot directly support a political party or candidate. There are plenty of grey areas when it comes to this restriction. That’s why non-profits need help from law firms like Cassels Brock & Blackwell. Without expert legal guidance, organizations could lose their non-profit statuses.
- Non-profit organizations also have to jump through a lot of hoops. A private business can operate without much government oversight. Yes, they have to follow industry regulations, but they can keep certain information secret from the public.
Non-profits don’t have this luxury. They have to fill out a lot of paperwork that tells the government exactly what they plan to do. A non-profit also needs a board that guides it towards a stated mission. A non-profit’s executive director, for instance, doesn’t get to make financial decisions, such as whether the organization can dip into financial reserves to support a project. Those decisions get made by a board of directors. That often makes the decision-making process slow and cumbersome, especially for organizations that prefer moving quickly.
Forming a Non-Profit Organization
There are a lot of rules for forming a non-profit organization. Firms like Cassels Brock & Blackwell can help any interested party fill out the necessary paperwork and meet their legal obligations.
When forming a non-profit, the organization needs to create a Company Registry that lists every member of the organization. Those members include at least three directors who oversee the non-profit’s activities.
The organization also needs to hold meetings, at least once a year, and file annual returns.
Directors will want to spend time developing bylaws that specify things like:
- membership rules
- when and where meetings take place
- how voting takes place
- who keeps records and where records are stored
- what officers fill other roles within the organization
Many non-profit organizations decide to incorporate. Doing so can give you additional benefits. Forming a corporation, of course, requires additional steps.
A non-profit does not have to take this step, though. It can operate without an incorporated status. Several non-profits forgo this option because it doesn’t benefit them greatly.
If your organization could potentially benefit from non-profit status, contact the expert corporate lawyers. They can look at your organization’s current structure and help you decide whether non-profit status is right for you.
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