A non-profit organization (abbreviated as NPO, also known as a not-for-profit organization) is an organization that does not distribute its excess profits to owners or shareholders, but instead uses them to help pursue its goals.
Non-profit organizations are established for a variety of purposes, most commonly charitable, educational or religious. Some common examples are schools, hospitals, houses of worship, museums, fraternal organizations, food banks, homeless shelters, trade unions and other volunteer organizations. Non-profit organizations must be organized as either trusts, associations or corporations.
Forming a non-profit organization is a multi-step process.
1. Forming a Non-Profit Corporate Entity
The first necessary step is the formation of a corporate entity in one of the United States. Although this step closely resembles formation of a regular for-profit corporation, there are specific requirements that must be observed when forming a non-profit entity. State fees may also be different from those for-profit corporations, usually lower.
2. Applying for Federal Tax Exemptions
Once the non-profit entity is formed, the second step is application for tax-exempt status with the federal government. The most commonly-used federal tax exemption used for non-profit corporations is in Section 501(c)(3) of the Internal Revenue Code, which is why most non-profit organizations are referred to as "501(c)(3)" companies. The application is lengthy and complex and usually requires an experienced specialist to complete it. Once the non-profit is granted its tax exempt status by the Internal Revenue Service (IRS), only one step remains.
3. Applying for State Tax Exemptions
The final step is to obtain tax-exempt status in the State where the company is incorporated. Some states grant this status automatically, based on the non-profit formation documents and the 501(c)(3) status. In other states, a separate application is required.
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