Defining Incorporation
Incorporation is a state legal process which forms a separate legal entity through which the nonprofit organization operates. It serves to protect the individuals within the group with limited liability. If anyone sues the group, it normally will be the corporation and its assets which are liable rather than the individual leaders.
The process of incorporation is not a lengthy one, but one which requires the careful preparation and filing of certain documents with the Office of Secretary of State, the formation of a board of directors, appointment of officers, adoption of by-laws and other procedural requirements such as annual meetings.
Incorporation papers can be requested -- along with instructions and fees -- and filed with the Secretary of State's office. It is wise, but not a requirement, to have the paperwork filed by an attorney, especially if you plan to seek tax-exempt status. You will receive a certificate of incorporation, which in Georgia is renewed annually for a $15 charge.
Responsibilities and Benefits
Adapted from Nonprofit Organizations: An Operating Handbook for Nonprofit Organizations, by Barbara Singer
· Definition of a Nonprofit Enterprise
Nonprofit entities may not distribute profits to their members. A nonprofit enterprise is an organization in which no profit may inure to the benefit of its members.
A public benefit nonprofit organization has a charitable purpose, derives much of its support from contributions, and is prohibited from distributing its income or its assets to its members.
A mutual benefit nonprofit organization primarily benefits its members, derives most of its support from the sale of goods, or the rendering of services, and, upon dissolution, may distribute its assets to its members. A nonprofit enterprise may also be classified as a cooperative or a religious corporation.
· Benefits of Nonprofit Status
A nonprofit enterprise may apply for and receive exemption from federal and some state income taxes and property tax. Reduced postal rates are available to nonprofit enterprises.
· Liabilities of Nonprofit Status
Nonprofit organizations often must rely on public and private financial support, which from time to time may not be forthcoming. Generally, equity financing is not available to nonprofit enterprises.
· Definition of Tax-Exempt Status
A tax-exempt enterprise is a nonprofit entity that is determined to be exempt from federal income taxes by the Internal Revenue Service and need not pay taxes on any related income that it makes during the year. An organization may have to pay certain taxes on revenue that is unrelated to its mission.
Individuals or corporations that contribute to tax-exempt organizations may take a charitable deduction for all or a portion of their contribution. A tax-exempt entity must file periodic reports with the IRS.
Federal Employment Identification Number (FEIN)
The organization must apply for a Federal Employer Identification Number (FEIN) by filing federal IRS form SS-4. The FEIN is the organization's equivalent of an individual's social security number. In Georgia, you must also register as a charitable organization or obtain a business license. Once you hire employees, you will be given a state employment number.
By applying for a FEIN, you then become listed in the IRS computer. If you hire staff, you must: keep payroll records; file periodic payroll reports; deposit payroll taxes; fill out a W2 form, obtain employment eligibility verification, and maintain reports for each employee; and comply with a number of other state and local requirements required by law.
The Benefits of Having a Fiscal Agent
A fiscal agent is an organization that has already established incorporation and tax-exempt status who is willing to be a "parent organization" to a group that is just getting started. With a fiscal agent, the new organization is under the umbrella of an existing organization.
Because the preexisting organization would become legally responsible for the newly formed organization, affiliation is done through a contract. The contract usually states a specific time period for the "parent" status and specific agreements pertaining to the individual organizations.
It is strongly recommended that a new organization explore starting out this way. Even if only for a year, it allows both the founders of the organization and the community to see that a new group is indeed a needed entity that is well on its way to becoming a stable organization.
Having this period of time before applying for Incorporation, Federal Employer Identification Number and federal tax exemption is very valuable for establishing a solid mission statement, a solid board of directors, conducting a needs assessment, preparing a business plan, and building a base of financial support.
Finding a fiscal agent takes creativity and thought. The fiscal agent should have a similar purpose/mission so that affiliation will be mutually beneficial. Creativity comes in finding where both of the organizations can benefit from the agreement. Does an organization need more community exposure? Is the new organization an extension of a program that the existing organization would like to provide?
Grantmakers like and encourage collaboration. By operating under a fiscal agent, you prove your willingness to combine your efforts with those of existing organizations.
|