Nonprofit organizations often operate like a standard business, but they must adhere to additional state and federal laws when it comes to tax-exempt status and charitable donations. Let’s start with the basics.
Tennessee is home to a whole list of wonderful not-for-profit organizations. Some are aimed at helping veterans find employment, while others provide legal counsel for low-income residents. While a nonprofit often operates like a standard business, it must adhere to additional state and federal laws when it comes to tax-exempt status and charitable donations. Let’s start with the basics.
What is a nonprofit and what do they do?
First, it is important to know that there are two primary entities of which you might consider: 501(c)(3) and 501(c)(4). A C3 organization must operate exclusively for a charitable purpose. Examples include education, civil rights, and religious groups. However, a C4 nonprofit must operate exclusively for the promotion of “social welfare,” which commonly looks like fire departments and associations.
What are the benefits of a nonprofit organization?
The primary reason for structuring as a nonprofit is the eligibility for a tax-exempt status. Upon filing the proper forms with the Internal Revenue Service (IRS) and being approved as tax-exempt, the entity will be exempt from paying tax on contributions and on items purchased for the organization. For example, if you’re opening a nonprofit to raise money for women affected by domestic violence, this tax-exempt status could mean a lot more money being spent on the cause, and not on income tax and sales tax. Moreover, any contributions made to a 501(c)(3) organization are tax deductible for the donor. Note: this donor exemption only applies to C3 organizations and not their C4 counterparts.
Steps to Opening a Nonprofit in Tennessee
Opening any business entity can be an overwhelming process. However, opening a nonprofit does require additional steps, such as obtaining the tax-exempt status and more stringent annual filings. As with many things in business, sometimes a hiring an experienced business lawyer is the best choice to ensure growth and success.
