Incorporation of Non Profit Organization

Introduction to Incorporation – Incorporation of a non profit organization is a vast subject and needs a comprehensive treatment.

‘To’ or ‘Not-to’ Incorporate ? While making this choice , We would recommend an organization to incorporate if –

a) The expected annual budget for the organization in years to come exceeds USD20000. (Just a thumbrule)

b) The organization is expected to continue its activities in the foreseeable future.

You might decide to start an unincorporated non profit organization if –

a) This is a temporary project that you wish to undertake

b) The annual budget is less than USD 20,000. (again a thumbrule)

The advantages of incorporation are as follows –

Increased Credibility: Perhaps the greatest advantage of incorporating is an increase in the credibility of the organization.Incorporation provides a formal and a legal strucutre to a non profit organization. An incorporated organization is also percieved to be more accountable than an unregistered organization. For these reasons, Funding agencies do prefer incorporated organizations over the unregistered ones.

Limited Liability: Incorporation also allows to separate the personal liabilities of the incorporators from the organization’s liabilities. Post incorporation the liabilites of the organization are treated as separate from the personal liabilites of the incorporator, board members, employees and officers. Thus the personal assets of the members are protected and not at risk, in the event of suit against the organization where the organization may become liable to pay.

Other benefits – A duly incorporated non profit organization enoys certain other benefits like – accessibility to cheap postage rates, free access to select media for announcements and publicity and greater acceptance by volunteers and other stakeholders of the organization.

However Incorporation also brings along certain serious disadvantages.

Delegation of control: The greatest disadvanatge of incorporation is the loss of a centralized control. More often than not, the idea of setting up a non profit organization is conceived by enterprising individuals with certain vision in mind.  An ideal situation in suh case is not to let dilute the vision in anyways. However Incorporation leads to dilution of control from a few individuals to a larger board of members. The control further dilutes as rights and responsibilites are delegated to employees and non members after incorporation. This is a major issue that needs to be tackled effectively after incorporation.

Compliance costs: Incorporation brings along the need for multiple compliances with strict deadlines. The burden of increased paper work is even more during the formative years for the organization.The documentation and administartive work involved in forming and subsequently running a non profit organization can be really intimidating for an incorporated organization.

To be able to comply, the organization first needs to set up a formal accounting system in place. This would in turn require hiring of qualified accountants.

Failure to comply with the obligations can lead to serious consequences including civil and criminal proceedings against the organization and the defaulting members.

Some of the major compliances includes conducting of annual audits, filing of annual reports, passing of resolutions for all major activites, filing tax returns and paying taxes, maintaining a vouching system, preparing budgets, conducting annual and periodical board meetings, complying with the conditions of funding agencies, conducting internal inspections and internal audits, filing employee related documents like attendance, payroll processing, employee benefits management.

And there are certain  compliances where they have to be separately dealt with for federal, state and local laws. All these compliances entails one time and recurring costs.

Absence of privacy: Incorporation means complete transparency in the operations of the organization. A lot of vital information are to be periodically submitted to the office of attorney general, department of secretary of state, Revenue department and others.

Types of Non Profit Incorporation

A non profit organization may be established in 3 different ways –

1) As a Private Foundation – This type of incorporation is suitable for organizations that expect funds to be raised from a limited number of members. This is mostly suitable for incorporating funding agencies.

2) As a Membership organization – This class of incorporation is suitable for organizations that are being established for the benefit of or information sharing amongst  its constituent members usually comprising of specialized group of individuals.

3) Service Organizations – This incorporation is suitable if the organization proposes to provide charitable services to the public at large and not to a small or a restricted beneficiary group.

The next section elaborates on issues like – Who will be the incorporator, Choosing a corporate name, Choosing a corporate purpose, Members/No members incorporation and Additional provisions