Non Profit and 501 C 3 FAQs
Lets talk about Non Profit and 501 C3 organizations and where to start them for a minute. We are going to answer the following questions:
- Is there a difference between a non profit and 501 C3?
- What is the process to set up a non profit organization?
- How many people do you need to set up a non profit organization?
- Can I purchase property and not affect my tax exempt status?
- Where should I Start my business? Can I set up my business in any state; or does it have to be in the state I live in?
- What will happen if I don’t have a separate bank account for the business? Can they go after my personal money?
1. What is the Difference Between a Non Profit and a Tax Exempt 501 C3?
When we refer to a non profit organization, we are referring to any organization formed and organized for an non profit purpose. A 501 (c) (3) is a recognition by the IRS that the organization is now exempt from all income taxes. Tax exempt however, is merely the result of the non-profit being recognized. Most tax exempt companies are non-profit organizations set up for charity, religious, literary, or educational purposes.
- A non profit corporation is a business entity incorporated at the state level where there are no equity owners that hold shares of stock. Also, none of the corporate income is distributive to members, directors, or officers. Instead, such non-profit corporations typically are controlled by members that elect a board of directors.
- Tax exempt 501(c)(3) non-profit corporations are classified as either a public charity or a private foundation. Generally, organizations that are classified as public charities are those that are churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities; have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities; receive income from the conduct of activities in furtherance of the organization’s exempt purposes; or actively function in a supporting relationship to one or more existing public charities.
Private foundations, in contrast, typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.
2. What is the process to start a non profit company?
- First thing is that you would need to file with the state and organize your business so that you can receive your articles of incorporation.
- As soon as you receive the articles of incorporation, register the company with the IRS. This is so that you will be recognized as a tax exempt organization.
- Its important to file the articles with the IRS as soon as possible because you will need to answer many questions about your organization. If you complete the questions early, you would have to answer less questions regarding your business, because there is less information to process. The longer you wait, the more questions you will have to endure which can make the process a longer one.
- You should then receive a letter of determination from the IRS with in two to six months, and your business should be ready to go.
If you’re not sure about what to do or seem to have a hard time with the process and you are ready to start, we can help you create your non-profit organization.
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3. Do I need a specific amount of people to create my non profit organization?
Because a non-profit organization, a total of 3 people must direct the entity. You have been given the power of a tax free business. The benevolent purpose must be carried out by all three members of the company. A non-profit organization retains all money from the business. But don’t forget, that you still have administrative expenses and salary.
4. Can I purchase property with out affecting my tax exempt status?
It is time to purchase a secondary building for the business. Can you purchase a new building without it affecting your tax exempt status? The answer is yes. It is advisable however, to create a multi member LLC for the corporation. You could purchase the building through the multi member LLC, and lease the building to the non-profit organization.
This way there are many advantages to both entities. The multi member LLC would receive an income. The depreciation of the building with off set the rent income. Leasing the building to the non profit organization could result in the appreciation of the building which will be to the advantage of the LLC in the years to come. It is important to discuss that the lease must adhear to a few rules. The lease must be at fair market value as indicated by an appraisal, and it must be an at arms length transaction with full disclosure.
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5. Where should I start my business; does it have to be formed in the state where I live? Can I choose which state I set it up in?
When considering where to set up a business, you must entertain all ideas about laws and regulations of businesses. Yes you can set up a business anywhere. There is however, a way to go about it. Many times the it may be that the business owner would want to open the business in another state. Nevada, for example, offers asset protection. Because there are so many choices, you may want to speak to a legal representative to decide which of the many options are right for you. Perhaps, an entrepreneur would set up his business in Delaware because of it anonymity and it background history of business law. Most new business owner do not mind paying the cost to be qualified. With the costs, state offers them asset protection.
6. What will happen if I don’t keep my business expenses and personal expenses separate?
When you open your new business, you should immediately open your new bank account under the business name. It is also important to make sure that you keep records on your business expense. The problem many new entrepreneurs have is where do I get the money to finance my brand new business? You can loan money to your business and pay yourself back. Another option is to invest in your business. By placing your company’s money in an account, you are also creating a protection against any type of liability that may come up.
Final Thought: Procrastination is the number one enemy of the entrepreneur.
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