Forming a Nonprofit
Thinking of Forming a Nonprofit in New York? There’s a Lot to Consider, but the Law Firm of Vaughn, Weber & Prakope, PLLC is here to help.
With a little extra effort in the planning phase, nonprofits can avoid a lot of work and expense in the long run. The Law Firm of Vaughn and Weber can help new and established nonprofits decide what legal entity to chose, maintain tax exempt status, and much more.
Should You Incorporate?
Unincorporated associations can qualify for Federal tax exempt status, if they are engaged in exempt activities. This means that incorporation is not necessary for avoiding tax liability. Nevertheless, for most organizations, incorporation provides many advantages.
The Advantages of Incorporation
Most often, nonprofit associations incorporate for the same reasons businesses and other groups incorporate – to avoid personal liability. Nonprofit corporations, like business corporations and other legal entities, have a legal existence independent of their directors and members. As long as nonprofit directors and members abide by the law when administering the affairs of the organization, they will not be personally liable if, for example, the nonprofit is sued or can’t pay a debt. This is especially important for organizations that promote athletic activity, serve food, gather large groups, or engage in other activities that seem likely to expose the organization to legal liability.
Incorporation adds an air of legitimacy to an organization. Nonprofit corporations are required to adopt certain decision-making processes (by-laws), and are prevented from using assets in certain ways. New York law prevents nonprofit operators and board members from using nonprofit assets for their own financial gain, and requires nonprofits to adopt conflict-of-interest policies.
This element of formality and constraint gives donors confidence that their contributions will not be misused. Without these safeguards, individuals may be hesitant to contribute to an unincorporated association, even if they sympathize with the group’s goals and purposes.
Nonprofit Corporations and Tax Exemption
Nonprofit incorporation and tax exemption are not the same. The two designations (incorporation and tax exemption) are issued by two different governing bodies (New York State, and the Federal Government, respectively), and do not perfectly overlap. Just as it is possible to avoid tax obligations without incorporating as a nonprofit, it is also possible that the IRS would deny tax exempt status to an organization incorporated under New York’s nonprofit corporation law. When incorporating a nonprofit, it is very important that the nonprofit purposes are drafted with the IRS tax exempt categories in mind. If a New York nonprofit’s purposes do not satisfy the IRS, it may be denied tax exempt status, even though New York recognizes that the organization is nonprofit.
Tax Deductible Contributions
An organization may be exempt from Federal Taxes under several categories. Not all of those categories allow donors to write off contributions.
As a general rule, contributions to charitable organizations are deductible, while contributions to other types of nonprofits are not. However, it is not always immediately clear whether a nonprofit is charitable. Some organizations that may initially seem charitable may be denied tax deductible contributions, and some organizations that may not seem purely charitable may be approved.
Maintaining Tax Exempt Status
The IRS can always revoke tax exempt status if it believes that an organization’s activities deviate from its stated purpose. If this happens, a nonprofit may become liable for fees or penalties from the IRS. This can be very costly. When considering new activities, it is always important to research and review any potentially relevant revenue rulings. Revenue rulings can give nonprofits some idea of how the IRS might categorize a given activity, which will allow them to determine whether engaging in the activity jeopardizes their tax exempt status.
If you have questions about forming a nonprofit, run a nonprofit and have questions about particular activities, or have any other legal issues, call the Law Firm of Vaughn, Weber & Prakope, PLLC at (516) 858-2620 to schedule a free consultation.