To Be Or Not To Be (a Nonprofit)
As each local Modern Quilt Guild organizes across the country you might want to consider setting up your guild as a nonprofit corporation. As your guild grows and starts to manage a larger amount of money and increasing membership, this will be a greater concern. There are both advantages and disadvantages of becoming a nonprofit.
The main advantages of forming a 501(c)(3) nonprofit organization include the following:
- Tax-exempt status: Your guild will be qualified for tax-exempt status. As a nonprofit organization the guild will not pay taxes on the profit of its activities. Typically, the organization will not only be exempt from income taxes, but also from property taxes on real estate and other property.
- The guild may solicit tax-deductible contributions/donations: This will become useful especially as your guild grows in membership and it’s involvement in the community. Whether it is selling raffle tickets to your opportunity quilt or a donation of materials or equipment from a business or organizations having a nonprofit status encourages donations, because tax law permits such donors to deduct their contributions from taxable income.
- Protection from Personal liability: Usually, incorporating a nonprofit organization protects the directors, officers, and members of the nonprofit from personal liability for the organization’s debts and other obligations. If the nonprofit is sued, the general rule is that only the assets of the nonprofit are at risk with certain exceptions.
- Eligible for Public or Private Grant Money: This may not be directly relevant to a guild but, being a nonprofit charitable organization may ensure easier access to public and private grants, which often require 501(c)(3) status for eligibility.
As there are advantages, there are also disadvantages to forming a 501(c)(3) nonprofit organization, namely cost in both time and money and paperwork.
- Cost: Creating a nonprofit organization takes time, effort, and money. Many of your standard requirements are pretty easy but, since a nonprofit is a legal entity under federal, state, and local laws, the use of an attorney, accountant, or other professional may well prove necessary. In addition, incorporation in most states, including the application for federal tax exemption, costs $200–$400.
- Paperwork: Because it is a legal entity, a nonprofit organization will be required by the state in which it is incorporated to keep detailed records. Certain documents—articles of incorporation, bylaws, annual reports, financial records—must be prepared in a specific manner and filed with specified agencies by certain deadlines. The nonprofit may also have to file Form 990 with the IRS annually.
The Basic Steps:
You may want to hire a lawyer for direction in incorporating your nonprofit and obtaining 501(c)(3) status. You should also tap into your guild membership. Maybe one of your members has experience in incorporating a non-profit or knows of someone who does. Be sure to take advantage of all of your resources.
In a nutshell the steps are: file the Articles of Incorporation with your Secretary of State making sure it includes the required components to be eligible for a 501(c)(3) tax exemption.; apply for your federal EIN and then apply for your Federal 501(c)(3) tax exemption.; in a few states you will have to apply for State Tax Exemption as well; draft your corporate bylaws and appoint directors (these may be earlier steps).
Nolo.com has a very good summary on how to form a 501 (c)(3) nonprofit corporation (http://www.nolo.com/legal-encyclopedia/article-30228.html) and also has some great reference books as well. Nolo list the steps in this order:
- Choose a business/guild name: Choose an available business name that meets the requirements of state law. Make sure that this name conforms to state law and is available.
- Prepare and File Your Articles of Incorporation: File formal paperwork usually called articles of incorporation, and pay a small filing fee (typically under $100).
- Apply for Your Federal 501(c)(3) Tax Exemption and Your State Tax Exemption (if applicable): Apply for your federal and state tax exemptions.
- Draft Corporate Bylaws: Create corporate bylaws, which set out the operating rules for your nonprofit corporation.
- Appoint Directors: Appoint the initial directors. (In some states you must choose your initial directors before you file your articles, because you must list their names in the document.)
- Hold a Directors Meeting: Hold the first meeting of the board of directors.
- Obtain Licenses and Permits: Obtain licenses and permits that may be required for your corporation.
Disclaimer: This information is just for informational purposes and should not be taken as legal advice. If you need legal advice, please contact a lawyer.