THREE MYTHS OF NONPROFIT ORGANIZATIONS
I meet with clients often that want to start a nonprofit organization here in Florida. Typically when I question the intention of the organization I usually get the response, “I just don’t want to pay taxes for providing services.” Unfortunately, for those individuals, the laws that govern nonprofits are designed specifically to protect the integrity of the nonprofits.
At the end of the day, the nonprofit is set up for a purpose that will somehow contribute to the community or society. A nonprofit is a group organized for purposes other than generating profit and no part of the organization’s income is distributed to its members, directors, or officers. Generally speaking, nonprofit corporations are often termed “non-stock” organizations. In other words, the organizations do not have to worry about reporting to its “owners” or “stockholders”. At the end of the day, the nonprofit is set up for a purpose that will somehow contribute to the community or society.
The first myth
that most people believe is that in setting up their own nonprofit they can have a for profit business and hide it under the nonprofit organization as a way to avoid tax ramifications. However, nonprofits are actually heavily scrutinized for many reasons but especially in the area of tax liability.
A nonprofit may allow for the organization to have certain benefits such as exemption from state sales tax, property tax, and income tax. However, this is not something that is automatically extended to every nonprofit. In order to qualify for these exemptions you must first make an application with the Internal Revenue Services. If the IRS then feels that you qualify for this exemption it will extend it to you. Nonprofits have many critics because of this. The flip side to this is that they must restrict their activities to that which the government tells them. The grass is always greener.
The second biggest myth
is that there is only one type of nonprofit. The most commonly known nonprofit is the 501(c)3. The 501(c)3s are the most commonly known and they include but are not limited to churches, charities, and educational organizations. Nevertheless, nonprofits can be so much more. There are approximately 27 different types of nonprofit organizations that can be formed and used for many purposes. One that seems to be overlooked is a 501(c)11, which is a teachers’ retirement fund association. Most educators have some familiarity with it. However, depending on the purpose of the organization, that will determine the type of nonprofit it will be.
The third myth
about nonprofits is that they are owned by any one person. A nonprofit is not owned at all, it is a public organization that belongs to the public at-large. The parties responsible to operate the organization for the stakeholders are the members of the board of directors. Often times when people want to begin their nonprofit they want to make sure that they cannot be removed as the founder of the organization. However, unfortunately if you begin a nonprofit you must be willing to part with it in order for the organization to serve a greater purpose.
Nonprofits serve great humanitarian purposes and should be encouraged. Unfortunately, there is so much abuse of this privilege that it is becoming increasingly more difficult to start a nonprofit organization. In order to be able to serve your community you must know the facts and laws regarding a nonprofit. Preserving the corporate formalities and understanding what the law requires from your organization are key in keeping your nonprofit running properly. You should always seek the advice of a legal professional that will be able to walk you through this process.
Understanding the ins and outs of the nonprofit will make for a successful organization and allow you to serve your community here in the Central Florida area.