Over the last couple of weeks in the Legal Corner, we’ve discussed a variety of topics relating to legal considerations for farmers. This week, we are shifting our focus to the formation of nonprofit organizations and the important role they play in society.
The creation and development of quality nonprofit organizations is essential to the function of our society as a whole. Nonprofit organizations are able to fill a void in services and supplement the efforts of our government. The Congressional Research Service provided a report for Congress the fall of 2009 that provided a great overview of the impact nonprofit organizations have on our country’s economy.
Contrary to what some people may think, the nonprofit sector is not draining governmental resources. Rather, only 29 percent of funding for registered nonprofits comes from government sources. The majority of funding for nonprofit organizations is generated through their own services and donations from private individuals.
The nonprofit workforce is the third-largest behind retail trade and manufacturing. According to the National Center for Charitable Statistics, there are more than 1.5 million registered nonprofit organizations in the United States. This figure does not include the vast number of grassroots organizations that are not recognized as a nonprofit organization by the Internal Revenue Service but contribute significantly to improving the quality of life of many people across the country.
The IRS gives a special designation for organizations that register as a nonprofit. This designation is a 501 c(3) and corresponds to the Internal Revenue Code that provides tax exemption for charitable nonprofit organizations. An organization can be a nonprofit without registering with the IRS but will not have the same benefits available to it as an organization that has gone through the process.
An organization seeking to register as a nonprofit organization must first do research to make sure their proposed organization’s mission is addressing a need of their community. Also, organizers should consider the amount and degree of funding necessary for them to effectively fulfill their organization’s mission. Careful consideration should be given to the organization’s charitable purpose because this is of particular interest to the IRS.
Lastly, the organization should take the necessary steps to secure a viable name for their organization, secure an EIN — employer identification number — and file the appropriate paperwork with the state of North Carolina. There are a host of other documents that organizers should draft to ensure their organization has a solid foundation for the anticipated great work they set out to complete.
These documents are bylaws, conflicts of interest polices and compensation policies. Once all paperwork is filed with the state, then the organization must make a filing with the IRS to be deemed a registered nonprofit organization under 501 c(3) of the Tax Code. There is a fee required for submitting the paperwork to the IRS.
There are a number of benefits for an organization seeking to be recognized by the IRS as a tax-exempt organization. The main benefit is that the organization does not have to pay taxes like other corporations formed under different sections of the Tax Code.
Also, individuals who donate to a registered organization with the special 501 c(3) designation can take a deduction on their personal income taxes for their charitable contribution. Registration with the IRS can also make it possible for organizations to qualify for certain grants from government and private foundations that require the registration before they will award grant funding.
Please remember that this information is only meant to inform our readers. This article does not include all of the detailed information related to forming a nonprofit organization.
If you have any additional questions about necessary steps to form a nonprofit, registering a current nonprofit organization with the IRS and/or drafting internal documents for your nonprofit organization, please consult an attorney. As always: Be informed. Be prepared.
Bellonora McCallum is an attorney at the McCallum Law Firm, PLLC, in Rockingham. Reach her at 910-730-4064 or visit www.mccallumlawfirm.com.