Pros and Cons of Nonprofit Incorporation
Tax Deductions and Liability Issues Are Top Persuaders
State incorporation is usually the first step towards becoming a fully tax-exempt charity.
But many startup organizations wonder, “Is it worthwhile?” To help you decide, we've put together the advantages and disadvantages to nonprofit incorporation and IRS exemption.
Benefit 1: No Taxes
As a nonprofit corporation, your organization can get state and federal exemptions from corporate income taxes plus certain other taxes.
Federal corporate tax rates can be very high while state corporate taxes can take a bite as well.
If you expect to earn large amounts of money from your mission-related services, exhibits, product sales, or performances, you'll want to seek an exemption. A tax-exempt nonprofit also saves on local taxes from state and county.
Benefit 2: Tax Exempt Public and Private Donations
Once incorporated, most charities go on to apply for nonprofit designation from the IRS. As a 501(c)(3) nonprofit you can receive grants and donations. Foundations only give grants to 501(c)(3) organizations.
Individual donors to your nonprofit corporation can claim personal federal and state income tax deductions, and bequests may be exempt from federal estate taxes.
Benefit 3: Protection From Personal Liability
One of the most significant advantages of incorporation has to do with protecting members of your organization from personal liability.
Board members, officers, and employees of your organization receive protection from liability for corporate debts or lawsuits. Creditors can only go after your corporate assets, not the personal assets of the people who manage, work for, or volunteer for your nonprofit.
Even if you do incorporate and receive some of these protections, it is wise to purchase liability insurance to cover situations that may lie outside of incorporation law.
Benefit 4: Organizational Perpetuity
A corporation is separate from the individuals who manage or organize it. It is this separate legal existence that provides protection from liability. But it also means that the organization becomes immortal in a way.
The nonprofit corporation continues to exist beyond the lifetime or involvement of the people who began it or who have managed it. Because the organization persists in this way, it is more attractive to donors who want to fund a cause for the long term.
Benefit 5: Employee Benefits
Being a corporation opens the door for employee benefits such as group life insurance, health insurance, a pension plan, etc., advantages not available to workers in unincorporated organizations.
Benefit 6: Corporate Structure
Forming a nonprofit corporation is not simple. But the preparation requires clarity about mission, operating rules, and procedures for decision making.
It's essential for a nonprofit, whose board members may hold opposing ideas, to have clear-cut rules about delegation of authority and how to get things done. Having all of these principles in the articles of incorporation and bylaws makes running the organization much easier.
Other advantages of incorporation include exemptions from county real and personal property taxes; lower postal rates on third-class bulk mailing; cheaper advertising rates; free radio and television public service announcements (PSAs), and more depending on your activities.
Disadvantages of incorporation include a lot of paperwork and some expense. For instance, you may need to hire a lawyer to prepare your documents. Then there is the time and energy to comply with regulations and to grow your organization.
There are restrictions too, such as no pay for your directors and limits on political campaigning and lobbying. And when your organization closes, its assets must be given to another nonprofit.
But if the benefits of incorporating make sense and outweigh the disadvantages, you may be ready to move ahead. Certainly, if you anticipate that your nonprofit will grow, it would be wise to incorporate and apply for tax exemption earlier rather than later.
If you don't incorporate, you might be an unincorporated nonprofit association.
For the longest time you have been thinking about how great it might be to follow your passion and work for a non-profit. You fantasize about what it would be like, working with people just like yourself who are passionate about what they do. And you'll get to dial back on your workload and spend more time with your friends and family. What could be better than that?
Sounds great, but is it reality?
Here are some of the common misconceptions (pros and cons), and the truth about working at a non-profit:
It won't feel like working in a regular business: Just the opposite. Typical is the situation of Lisa Nash, CEO of Blue Planet Network. Before joining Blue Planet, Nash was a VP of Marketing at Yahoo! "The biggest surprise moving into a non-profit was that I could run Blue Planet just like a for-profit company in terms of setting goals, measuring progress and managing based on what works. The only difference was that our 'profit' was the number of people who gained access to safe drinking water." So if you are thinking about joining a non-profit, recognize that it will be run just like a for-profit company with the focus on aggressively achieving results.
I'll work fewer hours and be less stressed: Don't join a non-profit if you think you'll be spending more time with your family, because the reality is that you may end up spending even less time with them. People mistakenly think that working at a non-profit is like having a hobby. The reality is the stakes are so high in an organization that is trying, for example, to cure cancer, eradicate liver disease, or bring safe drinking water to many parts of the world, that the commitment to working harder and longer hours is often the norm. When you bring committed people together who are passionate about a cause, the energy that is created causes them to work more, not fewer hours.
The pace will be slower: Unlikely, given all that needs to be accomplished with limited resources. Moving too slowly can result in missed opportunities. Reaching each goal as quickly as possible is the highest priority, so expect to work harder and faster than you have in the past. In the quest to cure a disease, time is the enemy.
I'll be able to move up through the ranks: To a certain extent, in that you will have greater access to senior management. The downside is that there are only so many leadership spots at a non-profit. In a corporation there are lots of options for career advancements because there are usually more layers of management.
I'll be surrounded by people just as passionate as I am: For the most part this is true. However, just like in any organization, there will be those people who are there just to have a job.
My skill set may suffer: If anything, your skill set will strengthen and expand. In a non-profit you're not as siloed as you are in a corporation. Because resources are tight you're expected to wear many hats which creates opportunities to expand beyond your functional area. For example, in a non-profit you may be find there is no marketing communications department to turn to and that "you" in fact are that department.
I won't be able to leverage my experience back into the for-profit world: This depends on the non-profit. If it's a fairly sophisticated organization it's highly likely that your skills will be transferable to a for-profit company. Bob Madison is a great example of this as he's switched back and forth between for-profits and non-profits his entire career. For example, he moved from a communications role in the United Jewish Appeal to Communications Director at Golin Harris. Later he left his position as Director of Strategic Communications at Porter Novelli to join the American Liver Foundation as their National Communications Director. Madison was able to seamlessly move back and forth between these two worlds because the non-profits he worked for were large and sophisticated. He credits his non-profit experience with helping him start his own firm. Bob Madison is Founder of Dinoship, a communications firm that focuses on non-profits and healthcare.
The non-profit will likely have an unsophisticated management team: Committed, passionate people with strong management backgrounds are the norm, not the exception in the not-for-profit world. Importantly, the board members in the non-profits are selected because they bring a specific skill/talent to the organization that is critical to its health and longevity (e.g., fundraising, growing a start-up, a specialty in that area, etc.).
My network might dwindle: If anything, it will get stronger for two reasons. While all non-profits compete for charitable dollars, there's a greater cooperative spirit among people who work at "competing" non-profits. The second reason is that you will create stronger bonds with the people you work with internally. The passion you shared while working at the non-profit will continue long after you or they have left the organization and this translates to a long term network of strong contacts.
The environment won't be as efficient: In a non-profit, efficiency is king. People in a non-profit have to work in a more streamlined fashion. While corporations have money to throw at a problem, non-profits rely more heavily on ingenuity to counteract the fewer dollars they're working with. The key to success at a non-profit is the ability to do more with less and to make every dollar translate into $1.50 worth of gain for the organization.
If you're thinking of making the bold move into a non-profit you'll be happy to know that most people who have made the move are glad they did. The experience added another important dimension to their career and they felt good about making a valuable contribution to a worthy cause.
As Lisa Nash put it: "There's nothing like an inspirational goal you believe in with all your heart to make you move mountains".
Fred & Gladys
Executive Search and Coaching
Authors of GOAL! Your 30 Day Career Plan for Business & Career Success
Follow Fred Whelan and Gladys Stone on Twitter: www.twitter.com/WhelanStone