Just because a business is not-for-profit does not mean it can’t make money and pay salaries, even to the owners. There are several implications to being a not-for-profit, the most obvious one being potential tax exempt status. But Not-For-Profit and Tax Exempt are different things.
To begin with, a Not-For-Profit has to be approved by the Secretary of State. The Certificate of Incorporation needs a very specific “purposes” clause and those purposes are the primary area that the Secretary of State will review in determining whether or not to approve the formation. With a For-Profit corporation, it’s typically only the corporate name that is reviewed, as most corporations use a general purpose clause. Another important consideration that will be reviewed is the source of funding. Will your money come from a few private individuals, or will you raise money from some segment of the general public? How will you go about doing that, and who will do it?
A Not-For-Profit can have many purposes. They can be charities, fraternal organizations, schools or scholarship funds, etc. But just having one of those purposes alone won’t qualify you for either Not-For-Profit status or tax exempt status. To be approved as a Not-For-Profit business in New York, your business purpose needs to be carefully and thoroughly thought out, and the purpose clause in your Certificate of Incorporation (the legal document that gets filed with the Secretary of State and gives your corporation legal existence) must be equally well worded.
Upon receiving approval of Not-For-Profit status, the next step is to apply to the IRS for tax exempt status. This is a time consuming and labor intensive process. Among other things, the IRS has to approve your purpose as well. Having this in mind when you formulate your purpose clause in the Certificate of Incorporation is very helpful here.
You will also need to determine what part of the tax exemption laws you can qualify under to receive that status. And you will have to submit a lot of financial information, both current and projected, including where and how you expect to raise funds. If approved, you get provisional tax exempt status that doesn’t get made permanent for a few years. And if anything significant changes from your original application status, you need to appropriately notify the IRS, and possibly the Secretary of State, of that as well.
As experienced business attorneys in New York, we have years of experience setting up Not-For-Profit organizations that will clear the hurdles of the approval process and can assist you in setting up your Not-For-Profit venture.
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