Options for Structuring a Nonprofit Organization
If you plan to start a nonprofit organization you can choose any one of the following structures for your organization.
There are generally five possible structure options for forming a non profit organizations which are as follows:
- CORPORATIONS – A state law creates a corporation which is generally limited by and created under statutory law. A non profit corporation is formed without the intent of generating profit. Corporations exist separately legally, they can buy and sell property and enter into contracts. But a corporation has to act through its officers and agents and can not act by itself.
A corporation can do the following:
- Set conditions for admissions and make donations.
- Buy, hold, or sell property.
- It can establish compensation for its employees.
- It can carry any business and all such activities that are not forbidden by law which can help in advancing the mission and activity of the corporation.
- COOPERATIVES – A cooperative is generally a business that does not earn any income on its own but distributes its income to its members. This feature distinguishes a cooperative from a partnership or a corporation. The formation of cooperatives is usually as corporations under state cooperative laws and has bylaws and other organizational documents similar to corporations.
Allocating the economic benefits to its members based on the quantity of business done is the primary function of cooperatives. The purpose of the cooperative is forwarded by the Internal Revenue Code providing exemptions to cooperatives for income generated.
- TRUSTS – A trust is generally defined as a property interest held by one person known as the trustee at the request of another person known as the settler for the benefit of a third party known as the beneficiary. Trusts play roles where the activities of a non profit are mainly concerned with the management and distribution of assets because the administration of the trust is simpler than corporations and also have fewer reporting requirements.
A property can be owned and managed by a trust in its own name and can distribute such property according to its terms since the trust is a separate entity. Trusts can be exempted from tax only if they meet the 501(c) (3) requirements. Trusts are usually used by non profit organizations in such cases where money is collected, invested or managed passively. Scholarship funds and grants for charitable purposes are generally directed through trusts.
- LIMITED LIABILITY COMPANIES – Limited liabilities companies (LLC) are governed by operating agreements are generally formed by filing articles of organization. They are controlled either by their members or through management appointed by the members. Limited liabilities companies have gained popularity over the past few decades. The main idea behind the limited liabilities companies was to limit the liability to one or a few members of the LLC.
Tax treatment can be elected either as a partnership or a corporation by the limited liability companies. It can only get a tax exempt status if it has other tax exempt organization as its member. In some states, the limited liability companies can not be used for non profit purposes but they can qualify to do business in these states when formed in another jurisdiction.
- UNINCORPORATED ASSOCIATIONS – An unincorporated association is recognized as a separate legal entity in many states although it is less formal than a corporation. Unincorporated associations have some of the characteristics of corporations like they can buy, hold, and sell property and can sue or be sued. The Uniform Unincorporated Nonprofit Association Act (UUNAA) is adopted by the states that have recognized unincorporated associations.
A group of people which include neighborhood associations, campaign committees and other associations and groups generally start an unincorporated association which gets together to perform some function. It may have some structure or even officers and members. The association still exists even though the association is not registered with any particular government agency and no formalities of forming a corporation have been followed. It has the advantage of informality but can still qualify for tax-exempt status in many cases.