How Do I Qualify as a Nonprofit Corporation
Full Question:
Answer:
The answer depends on the purposes of the corporation and whether you would retain more than a reasonable salary from the income. In Arkansas, "not-for-profit corporation" means a corporation no part of the income of which is distributable to its members, directors, or officers. The IRS requires if your organization is applying for recognition of exemption as a charitable organization, it must show that it is organized and operated for purposes that are beneficial to the public interest. Some examples of this type of organization are those organized for:
· Relief of the poor, the distressed, or the underprivileged,
· Advancement of religion,
· Advancement of education or science,
· Erection or maintenance of public buildings, monuments, or works,
· Lessening the burdens of government,
· Lessening of neighborhood tensions,
· Elimination of prejudice and discrimination,
· Defense of human and civil rights secured by law, and
· Combating community deterioration and juvenile delinquency.
A nonprofit corporation is a corporation formed to carry out a charitable, educational, religious, literary or scientific purpose. A nonprofit corporation can raise funds by receiving public and private grant money and donations from individuals and companies. Certain federal, state, and local income, property and sales tax exemptions are available to nonprofit corporations. The federal and state governments do not generally tax nonprofit corporations on money they make that is related to their nonprofit purpose, because of the benefits they contribute to society. The most common federal tax exemption for nonprofits comes from Section 501(c)(3) of the Internal Revenue Code, which is why nonprofits are sometimes called 501(c)(3) corporations.
Statutory law generally determines whether an organization is exempt from taxes. Section 501 of the Internal Revenue Code (IRC) provides the basic rules for tax-exempt status at the federal level. The Internal Revenue Service (IRS) is the federal body responsible for recognizing that an organization qualifies for tax-exempt status. An entity that wants to seek recognition for this status must file a form entitled “Application for Recognition of Exemption.”
Under IRS rules, nonprofit corporations must abide by the following restrictions to retain their tax-exempt status:
· Nonprofit corporations with a 501(c)(3) tax exemption cannot participate in or contribute money to political campaigns. If they do, the IRS can revoke their nonprofit status, and can assess a special excise tax against the organization and its managers.
· Nonprofit corporations can engage in only limited lobbying activities. Tax-exempt 501(c)(3) nonprofits that influence legislation to any “substantial degree” face the loss of their nonprofit status. However, for tax-exempt nonprofits that want to participate in lobbying, the IRS simply sets a limit on the money they can spend on political activities.
· Nonprofit corporations must not distribute profits to members, officers or directors. A nonprofit corporation cannot be organized to financially benefit its members, officers or directors. However, reasonable salaries and expense reimbursements are permitted.
· Nonprofit corporations must pay taxes on income from “unrelated activities.” The IRS requires nonprofits to pay corporate income taxes on such unrelated income over $1,000, whether or not the group uses that money to fund its tax-exempt activities.
· Nonprofit corporations cannot make substantial profits from unrelated activities. If a nonprofit spends too much time on unrelated activities, or if the unrelated activities generate “substantial” income, the group’s nonprofit status may be jeopardized.
Please see also:
http://www.irs.gov/pub/irs-pdf/p4220.pdf
Please see the following AR statutes:
4-28-205. Lawful purposes.
Corporations may be organized under §§ 4-28-201 — 4-28-206 and 4-28-209 — 4-28-224 for any lawful purpose including, without being limited to any one (1) or more of the following purposes: charitable; benevolent; eleemosynary; educational; civic; patriotic; political; religious; social; fraternal; literary; cultural; athletic; scientific; agricultural; horticultural; animal husbandry; and professional, commercial, industrial, or trade association. However, labor unions, rural electric corporations, cooperative agricultural or marketing associations, etc., organized for either direct or indirect financial gain or advantage, and any cooperative associations coming within the purview of §§ 4-30-101 — 4-30-117, 4-30-201, 4-30-202, and 4-30-204 — 4-30-207 shall be governed by the particular acts applicable to such associations.
4-28-215. Compensation and reimbursement to members, directors, officers, etc.
(a) A corporation may pay compensation in a reasonable amount to its members, directors, or officers for services rendered and may confer benefits upon its members in conformity with its purposes.
(b) A corporation may make reimbursement to its members, directors, officers, or employees for expenses incurred in attending to their authorized duties, the expenses to be evidenced by receipt or other proper document.
