Under federal and state laws, you can enjoy certain benefits by setting up a business as a non-profit. To qualify, you must meet certain criteria—all profits must either be put back into the business or distributed to a qualified recipient under non-profit laws. Although employees may be paid wages, a non-profit cannot distribute income in the form of a dividend or return on investment to any person, including members, directors or officers.
Though a nonprofit can take many different forms, including partnerships, most not-for-profit businesses are non-profit corporations. You must file articles of incorporation, just as you would with any other business corporation. Customarily, you must include specific language indicating that your business is not for profit.
To qualify for a federal tax exemption, you must obtain approval from the Internal Revenue Service as a 501(c)(3) organization. It’s a fairly complicated process that requires that you demonstrate that your business or entity is organized and operated exclusively for religious, charitable, scientific, public safety, literary, educational, prevention of cruelty to children or animals, or development of national or international sports purposes.
The laws governing nonprofits vary from state to state, and many include not only tax advantages, but also immunity from tort liability. In most states, if you have been granted federal 501(c)(3) status, you will get an automatic state exemption.
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