Advantages of Incorporation
While incorporating your nonprofit can seem intimidating and requires a lot of paperwork, there are several important advantages to incorporating.
Limited Liability Protection
Limited liability protection is important if you want to protect yourself and any other director, officer, or employee. By incorporating as a nonprofit corporation, individuals working for and on behalf of the nonprofit are afforded limited liability protection of their personal assets if the nonprofit is ever sued or goes in debt. With limited liability protection, only the nonprofit can be sued or be liable for its debts, unless an individual was grossly negligent in her/his responsibilities owed to the nonprofit.
As a nonprofit corporation, you can receive federal and state tax-exempt status. While it is still possible to achieve this as an unincorporated nonprofit association, it is more difficult to do so. Receiving tax-exempt status means that the nonprofit is not required to pay corporate income taxes and certain other taxes.
Increased Organizational Credibility
Incorporating gives your nonprofit credibility, which can help in raising funds, receiving grants, and attracting donors. Without incorporation, it can be difficult for your nonprofit to receive grants, and your nonprofit can even be excluded from being able to apply for many grants. Getting donations from the general public is also more likely when a nonprofit is incorporated because donors feel more secure about their contributions and support knowing that they are donating to a credible organization.
Possible Tax-Deductible Contributions
When you incorporate your nonprofit and receive tax-exempt status at the state and federal level, you can attract more donors with tax-deductible contributions. This means that donor contributions, monetary or in-kind, can be deducted on their personal federal and state taxes. Bequests may also be exempt from federal estate taxes.
Not that receiving discounted rates is typically a determining factor in deciding whether a nonprofit should incorporate or not, but this is still a perk that incorporated nonprofits receive. For example, nonprofit corporations receive discounted rates on bulk mailing, stamps, and sometimes even lower marketing and advertising rates, as well as free radio and television public service announcements.
Once incorporated, a nonprofit can potentially exist in perpetuity, because it is a separate legal entity from its founders and creators. Therefore, even if and when management changes, that does not affect the nonprofit’s existence. This provides security for donors, knowing they are contributing to an established organization that will (hopefully) stick around for a while. Of course, with nonprofit corporations, if one does close up shop, all assets must go to another nonprofit.
Disadvantages of Incorporation
When considering forming any type of business entity, it’s important to weigh both the advantages and disadvantages. While there are a number of benefits to incorporating your nonprofit, there are also some disadvantages to consider.
Loss of Centralized Control
Many people who start nonprofits like to have control over how the nonprofit is shaped and controlled. This level of personal and centralized control becomes more strictly governed by rules and regulations nonprofit corporations must adhere to in order to obtain and maintain their tax exempt status. There is a formal structure that must be followed, although this can also be seen as a benefit because it helps create the separation of the nonprofit as its own legal entity. Rules can vary from state to state, so be sure to check your state’s regulations for nonprofit corporations.
Increased Paperwork, Time, and Expense of Running a Corporation
Probably one of the major drawbacks of incorporating your nonprofit is the amount of paperwork and time it takes to run a corporation. As a result of all the benefits nonprofit corporations receive, they are also heavily scrutinized. Many financial records must be publicly available upon request, and detailed recordkeeping is vital and required. So, not only is the paperwork for incorporating considerable, but so is the paperwork for maintaining tax-exempt status. It can take a lot of time to keep up with regulations. It can also be costly to incorporate. There are fees associated with incorporating, and there may also be fees for attorneys, accountants, and consultants as you set up your nonprofit and throughout your nonprofit’s existence.
Incorporating your nonprofit can feel daunting, but the benefits usually outweigh the disadvantages. Of course, if you're running a smaller operation and don’t plan to grow too big, then you may not consider the cost and time of incorporating to be worth it. If you’re still unsure whether to incorporate your nonprofit or not, you can consult an attorney to best advise you. If you do decide to incorporate, it is still a good idea to consult an attorney to help you with any paperwork, including drafting your bylaws.