When Should I Incorporate My Nonprofit?

As you plan your organization, you need to know when to incorporate the nonprofit. The decision has two factors: whether you should register as a nonprofit corporation in your state, and when, between concept and execution, to start with government paperwork. This post will address both factors.

Forming a nonprofit corporation, a legal entity, is different from federal or state tax exemption, a tax classification. For organizations seeking tax exemption, incorporation is the first step. You can read more about the distinction here.

Deciding Whether You Should Incorporate: The decision whether to incorporate depends on your mission, and current and planned activities. The primary reasons for incorporation are limited liability protection of the directors, credibility, and tax purposes.

Without forming a legal entity, the members’ and directors’ personal assets (home, retirement savings…everything) are at risk in a lawsuit. Incorporating provides limited liability protection, which means only the organization’s assets can be targeted.

Additionally, forming a nonprofit corporation adds legitimacy to your organization and its mission. The suffix “Inc.,” a bank account, and existing in the state’s records are solid trust factors for your community and potential donors.

If you’re like these guys, it’s time to incorporate.

You should also consider incorporating if the organization plans to do the following:

1)   Open a bank account

2)   Accept charitable contributions

3)   Apply for grants (public or private)

4)   Apply for tax-exempt status (though incorporation is not necessary)

These are all common and desirable activities for many nonprofits, and the advantages often outweigh the complexity of filing.

If your activities are small in nature, short in duration, or you would be a better candidate for fiscal sponsorship, incorporation might not be right for your organization.

Knowing When to Incorporate:

Take a step back, and look at your organization. Do you have a mission with a clear charitable purpose? Does it have directors, members, and others? Have you begun operating and are ready to collect donations? Do you have plans to do numbers 1-4 above? If you answered yes to any of the above, it might be time to incorporate.

State forms usually ask for an entity name, the names of organizers and directors, a registered agent address, and a description of your charitable purpose. If you know these details, it might be time to incorporate.

If your organization is in the “idea phase,” where you have the desire, but haven’t made plans to determine whether the idea is feasible, it probably is not time to incorporate. Starting a nonprofit is more like a business than you think, so you’ll need thorough planning to get started. Don’t be discouraged. The better your plan, the better your chances at fulfilling your mission!

The last element to consider is budget, both of time and money. State fees (and later, IRS fees) can be high, nor is the paperwork easy to figure out! We offer affordable filing services for getting your organization set up, reducing your stress, and helping you stay focused on your mission.

As always, deciding whether and when to incorporate is a business decision. Use this information as it applies to your organization. If you’d like to weigh in on the discussion, ask your question or write your comment below. We’d love to hear your experiences!