If you are looking to form a non-profit, they can benefit from a number of advantages and have a wide range of uses that go beyond the narrow definition and what are traditionally referred to as a not for profit organisation.
Additionally when incorporating in an offshore jurisdiction nonprofits have the added benefits such as higher asset protection, confidentiality and added tax leveraging.
Table of Contents:
A non-profit organisation (NPO) is a type of business that is formed with the aim of conducting activities and financial transactions for purposes other than shareholder profit. Recognised non-profits in the US are those which have been given tax-exempt status by the IRS because they contribute to the public good.
Non-profits are allowed to earn a surplus, but this must be reinvested so as to grow and further the goals of the non-profit, and cannot be withdrawn as distributions by its members. Non-profits have similar asset protection and limited liability features of normal corporations and LLCs. However, most of their transactions are not commercial.
There are different types and categories which non-profits can fall into. The two main distinguishing types of non-profits are “membership organisations” and “charitable organisations”.
A membership organisation conducts activities with the aim to benefit its members, and is usually supported by its members in turn. Examples include social clubs, sports clubs, special interest groups, etc.
A charitable organisation is one which conducts its activities so as to benefit the wider public or specific groups of society. It generally receives donations from the public, as well as from the government and other institutions. Examples include animal welfare organisations, those which provide food and shelter to the needy, environmental groups, etc.
Both of these types of non-profits have members which have similar rights and responsibilities to the shareholders of a corporation, with the exception that they do not receive financial gains from the organisation.
Within these two broad types of non-profit organisations are various sub-categories, including:
Non-profits, as the name suggests, are not formed with the intention of making profits for its individual members. Rather, they aim to benefit the wider society and those in need. As such, they enjoy a number of benefits and privileges which include:
The exact procedure for incorporating a non-profit can vary across different countries and states, and is also dependant on the type of non-profit which is being formed. However, bellow are the common steps which will generally need to be followed when forming an NPO.
It is important to begin by doing thorough research on forming Non-Profits in your jurisdiction and determining whether doing so will suit your particular situation and goals.
This should start by doing a needs analysis to determine whether the non-profit which you hope to form is actually needed where you are. You should also find out whether there are any other organisations doing similar work which could make your idea obsolete or unnecessary.
You should then check whether a non-profit organisation is indeed the right type of structure for your needs. Non-profits come with their own complications, and should not be formed with the hidden intention to just pay yourself a high salary and avoid taxes. There should be a genuine need for the NPO in order for it to acquire tax-exempt status. You should also seek to understand the alternative types of structures and whether any might be a better match for your needs.
Before you can actually go ahead with the incorporation process, there are some basic things you should first put in place. These include:
Once you have all the fundamentals in place for your non-profit, it is time to proceed with the incorporation process. The exact procedure and requirements will differ in each location, so it is worth getting professional and/or legal guidance during the formation process.
Typically, incorporating a non-profit will involve filing documents such as the articles of association with the governing authority in your jurisdiction and paying the relevant filing fee. This stage of the incorporation process of a non-profit is remarkably similar to that of a corporation or LLC.
After you have successfully incorporated your non-profit organisation as a legal business entity, you can proceed with filing for 501(c)(3) tax-exempt status with the IRS. This can involve a fee of between $275 and $600 and can take anywhere from 3 – 12 months to be finalised.
There are strict rules and regulations which non-profits need to adhere to so as to maintain their official status. You should start by registering with the agency in your state that is in charge of overseeing non-profit organisations.
You will then need to ensure you adhere to all financial and annual reporting requirements which are required by non-profit organisations. NPOs are usually more open to public inspection and scrutiny, and so you should keep comprehensive records of all finances and key activities to ensure things continue smoothly with the regulating authorities.
Finally, you should have a complete understanding of all the rules which apply to non-profits in your area and make sure that you follow them closely. This will protect you from putting your non-profit’s tax-exempt status at undue risk.
Non-profit organisations are definitely not the best type of business organization for everyone or all situations. However, they do offer their own unique features and benefits which can be useful in certain circumstances.
If your ultimate goal is to create an organisation which is not aimed primarily at financially benefiting its members but instead serves the wider public, then a non-profit organisation could indeed be the most appropriate type of business entity to use.
Furthermore, non-profits are useful in their ability to provide similar levels of asset protection and limited liability as that of a corporation, and benefit from being eligible for tax exemption and grants.
It is also allowable for non-profit organisations to employ staff, as well as to pay the main members/directors an appropriate salary. However, like the name suggests, they should ultimately be formed without the intention to make personal profit.
Why You Need A Plan B
Threats to Your Assets
Global Diversification Planning