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Formation and Operation of a Nonprofit Corporation

Formation and Operation of a Nonprofit Corporation

Nonprofit corporations are a useful tool for organizing for charitable, educational, religious, literary, or scientific purposes while reducing the risk of individual liability in accomplishing those goals. A nonprofit corporation is often referred to as a 501(c)(3) corporation due to the tax code provision under which most nonprofit corporations are considered exempt from federal taxation.

The two principal benefits of nonprofit corporations are the exemption of income in excess of expenses from taxation and the ability to obtain contributions that contributors may treat as a deduction on their tax returns. As with any corporate form, directors and officers of a nonprofit corporation generally are not personally liable for the liabilities of the corporation.

Nonprofit corporations normally are formed by filing articles of incorporation with a state agency. That agency may have forms available that can be filled in or used as models. The basic information required for the form usually will include the name of the corporation, the corporation’s address, the name and address of a registered agent who will receive legal papers served on the corporation, and the names of the corporation’s directors. The purposes of the corporation normally will have to be described at least in general terms, and those purposes should be charitable, educational, religious, literary, or scientific so that an exemption from taxation can be maintained.

After articles of incorporation are filed, a business identification number should be obtained from the Internal Revenue Service. A federal 501(c)(3) exemption can be sought by applying to the IRS on a form available from IRS offices or the IRS website.

As with any corporation, the number of directors required by state law should be appointed and bylaws should be drafted and adopted. A meeting of the directors should be held as required by state law, and any required permits or licenses should be obtained. State corporation offices will have helpful information on the details of setting up and operating a nonprofit corporation.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.

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Attorney Donald W. Hudspeth has more than twenty years’ experience practicing corporate and business law. Before attending law school, Mr. Hudspeth held a stock brokers license at the age of 21 and owned his own business at the age of 23. He was a business law professor at Arizona State University, West Campus, and has conducted classes and seminars for a number of higher institutions and organizations. Mr. Hudspeth has published two books on law and is the founder of the radio programs Law on the Edge and Law Talk.

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