Nonprofit Basics
Nonprofit corporations are entitled to grants, tax exemptions, and limited liability protection.
Nonprofit (or not-for-profit) corporations work well for all sorts of groups, from artists and musicians to people active in education, health, and community services. Often the reason for obtaining nonprofit status is simple -- it's usually a requirement for obtaining funds from government agencies and private foundations. Obtaining grants, however, is not the only reason to incorporate as a nonprofit.
There are two additional important benefits of forming a nonprofit: tax-exempt status and personal liability protection.
Tax-Exempt Status
Many nonprofit groups seek nonprofit corporate status to obtain exemptions from federal and state income taxes. The most common federal tax exemption for nonprofits comes from Section 501(c)(3) of the Internal Revenue Code, which is why nonprofits are sometimes called 501(c)(3) corporations.
If your group obtains tax-exempt status, not only is it free from paying taxes on all income from activities related to its nonprofit purpose ( see Earning Income as a Nonprofit Corporation), but people and organizations that donate to the nonprofit can take a tax deduction for their contributions. (To learn about applying for tax exemptions, read How to Form a 501(c)(3) Nonprofit Corporation.)
Protection From Personal Liability
Forming a nonprofit corporation normally protects the directors, officers, and members of the nonprofit from personal liability for the corporation's debts and other obligations. Called limited liability, this shield ensures that anyone who obtains a judgment against the nonprofit can reach only the assets of the corporation, not the bank accounts, houses, or other property owned by the individuals who manage, work for, or participate in the business.
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