Should you incorporate a 501 (c) (3) Non Profit organization ?

We recieve a lot many queries from people wiling to start a 501(c) (3) Non profit organization.

Even before one thinks of starting such an organization, the question arises why 501(c) (3) ? Why not an unregisered club or an association ? What are the diffrences between these two ? and How do you decide wether to incorporate a 501(c)(3) or whether to start an unincorporated association ?

Following are some pointers to decide this –

1) The most important thing to be considered here is prevention of duplication. If there is an organization in your area that is working on the same cause as yours, you should try enrolling yourself with the organization to further the cause, rather than setting up a new 501 (c) (3) Non Profit organization. Geting funds for causes that have existing organizations working in your area is a difficult proposition. On the other hand the cause that you wish to undertake is a novel idea, you should incorporate your organization formally with the department of the Secretary of state.

2) Small budget projects – if your non profit has an estimated annual budget of less than USD 30,000, it is not worth setting up a 501 (c) (3) organization as the processes involved in setting up and complying with various rules and regulations is too much of a botheration for a small amount as this. You would rather go for an unincorporated association or start a local chapter for an existing organization working on the same cause at other places.

3) If the donations expected for the cause would comprise of small amounts from a large number of subcribers, you will possibly not need to incorporate a 501 (c) (3) Non Profit organization. Incorportion is necessary, if there are funding agencies that would contribute a bulk of your donations, in which case, they would insist for a tax exempt status for the recipient organization.

4) Accounting & reporting – If you are incorporating an 501 (c) (3) organization, be prepared to set up a professional accounting system for your organization. You will have to hire proffesional accountants to ensure regular compliances. You dont only report to the department of the secreatry of the state but alo to the IRS department which periodically reviews the performace of the organization for renewing the tax exempt status. Beside this, youalso need to comply separately with the revenue department of the department of secretary ofstate for obtaining and maintaning exemptions from Corporate income Tax, State sales tax etc.
Another set of compliances involve obtaining the Withholding Identification number, if you happen to employ people. IF the number of employees is more than 3, you need to complete worker’s compensation formalities.

The reporting formalities of a 501 (c)(3)organization are exhaustive and non compliance results in cancellation of the registration or the tax exempt status.There are several other compliances which are beyond the scope of discussion here. If you think, you are prepared to comply with these without in anyways neglecting the cause, you could consider incorporating a 501(C)(3) organization.