Nonprofit corporations and unincorporated nonprofit associations are both formed for the purpose of providing a public good or service, but there are important distinctions and things you should consider if you’re trying to determine whether or not to incorporate your nonprofit.
Want to start a nonprofit? Learn how to start a nonprofit organization with our in-depth guide.
What is a Nonprofit Corporation?
A nonprofit corporation is a corporation formed for purposes other than making a profit. Typically, nonprofits are formed to provide a social or public good or service. Instead of being shared with shareholders, any profit goes back into the organization to be put towards the public good or service (keep in mind that profit is what is left over after expenses such as employee salaries, administrative costs, and any overhead).
As long as the nonprofit meets the necessary standards and regulations in which nonprofits are bound, they may receive tax-exempt status at both the federal and state levels.
You can lookup any 501c3 and find out what its tax-exempt status is by using our free 501c3 Lookup Tool.
What is an Unincorporated Nonprofit Association?
When two or more people come together to work toward a common goal, an unincorporated association is formed. If the common goal is to earn a profit, then a partnership or joint venture has been formed. However, if the common goal is to accomplish a social or public good or service, then the group is considered to be an unincorporated nonprofit association. No legal paper is required to be drafted or filed; hence, “unincorporated.”
Technically, if you have helped a family member or friend raise money for a certain cause, you have likely been part of an unincorporated nonprofit association. Maybe as a child, you and your best friend ran a lemonade stand during the summer to raise money for the local pet shelter. In that case, you formed an unincorporated nonprofit association. Many unincorporated nonprofit associations are formed for short term purposes and come and go as needed; and as you can see, many are formed without the organizers even realizing they have done so.
State Regulations of Unincorporated Nonprofit Associations
While unincorporated nonprofit associations are easy to form, there may still be state-specific regulations that need to be followed if you want to qualify for certain tax benefits. You can find links to each state’s tax-exemption rules and qualifications on the IRS’s website. Be sure to check with your state and local business offices to see if there are any registration requirements and regulations with which to comply.
Filing Tax Returns
While many unincorporated nonprofit associations are informally formed and dispersed once the goal is achieved, if such an organization continues indefinitely, it may need to file tax returns. In fact, many legal experts recommend that continuing unincorporated nonprofit associations register with the Secretary of State and apply for an EIN number.
IRS Tax-Exempt Status
Despite being unincorporated, it is possible for an unincorporated nonprofit association to gain 501(c)(3) tax-exempt status if its purposes fall within the IRS’s exempt guidelines. To qualify, you will need to file articles of association that outline the association’s purposes and draft bylaws, which will also need to be filed. If your association earns more than $5,000 in gross revenue, it will also need to file Form 1023, the Application for Recognition of Exemption.
If your association receives tax-exempt status, then it will need to comply with the IRS’s annual filing requirements. Depending on what threshold your association meets, you’ll need to file one of the 990 series forms. If the association’s gross receipts are less than $50,000 per year, then you’d file Form 990-N. If it is less than $500,000 per year, then you’d file Form 990-EZ. Anything more requires that you file Form 990.
Another benefit of obtaining tax-exempt status beyond the tax breaks your organization will receive is the ability to apply for and receive public or private grants. Without tax-exempt status, you may have a difficult time applying for most grants that could help you raise funds to operate your organization.
Along the same lines, it often helps to raise funds or in-kind donations if such contributions can be tax-deductible for the donors, and this is only possible if your organization has tax-exempt status.
Keep in mind that there may also be other tax exemption statuses that your association qualifies for other than 501(c)(3).
Differences Between Nonprofit Corporations and Unincorporated Nonprofits
While unincorporated nonprofit associations are formed simply by two or more people coming together with the common goal of providing a public good or service, nonprofit corporations are separate legal entities. They require more paperwork and maintenance to form and to stay compliant with standards and regulations in order to maintain their status as a tax-exempt nonprofit. As such, nonprofit corporations are afforded certain benefits, such as fewer formalities, limited liability protection, and the ability to enter third-party contracts under the name of the nonprofit.
1) Formal Structure and Paperwork Requirement
Unincorporated Nonprofit Associations have flexibility in structure and organization and more-lenient reporting and registration requirements. Nonprofit Corporations, on the other hand, are required to abide by strict rules regarding their structure, reporting, and registration, just like any other corporation. They also have an extra degree of compliance to follow in order to receive tax-exempt status.
2) Limited Liability
Nonprofit corporations, like regular corporations, benefit from limited liability protection, which means that individual directors, officers, employees, and shareholders are not personally liable for the actions or debts of the nonprofit corporations. In unincorporated nonprofit associations, each associate is personally liable for the actions and debts of the organization. Some states, like California, offer some level of liability protection, but not to the extent of the limited liability protection afforded to corporations. Keep in mind that without limited liability protection, an unincorporated nonprofit association is unable to bring lawsuits or be sued as a separate legal entity from its owner.
3) Contracting with Third Parties
While a nonprofit corporation can enter into contracts with third parties as its own entity, the individual associates of unincorporated nonprofit associations must personally enter into contracts with third parties and therefore be liable for those contracts.
4) Uniform Unincorporated Nonprofit Association Act (UUNAA)
As a result of the lack of legal protection and the confusion over how to treat unincorporated nonprofit associations, UUNAA was created to provide some advantages and regulations. These include:
- The ability to sue and be sued as separate legal entities.
- Legal capacity to receive, possess, distribute, or transfer property.
- Limited liability for tort and contract claims.
- In the event of dissolution or inactivity, there is a system for disposal of the association’s assets.
- An association can appoint or designate a person as its agent to receive all legal notices, demands, and service of process.
Thus far, there have been ten states that have adopted UUNAA: Alabama, Arkansas, Colorado, Delaware, Hawaii, Idaho, Texas, West Virginia, Wisconsin, and Wyoming (the District of Columbia has also adopted UUNAA). So, if you form an unincorporated nonprofit association in one of these states, your association can be treated as a separate legal entity.
Conclusion
Unincorporated nonprofit associations are great for short-term projects and goals, but if you continue your association indefinitely, you should consider setting up a proper nonprofit corporation. Incorporating will especially help if you are trying to raise funds to operate your nonprofit. The paperwork may seem daunting, but the benefits of incorporating will allow you to grow your nonprofit as well as protect you from personal liability. It is often recommended you at least register an ongoing unincorporated nonprofit association with your state.
If you have questions and are unsure about what to do, it is always a good idea to consult an attorney.
Use our guides below to learn how to start a nonprofit in your state: