Starting a Nonprofit: To Incorporate or Not?

One of the first decisions in forming a nonprofit, once the initial questions have been answered (see prior post), is to choose a legal structure for the new organization. While there are a number of choices (trust, corporation, or LLC), a nonprofit corporation is most often chosen. But why?

In choosing a legal structure, the first consideration is usually the level of risk that the nonprofit will incur. For example, will the organization simply serve as an opportunity for people with similar interests to meet, maybe hear lectures on various topics? Or will it conduct activities and programs for children or elders? Will the nonprofit own real estate in the future? Will it have paid staff?

A very simple organization that meets occasionally may be suited to an unincorporated association. But a more complex organization, whether all-volunteer or staffed, that will conduct active programs, enter agreements with third parties (for example, speakers, teachers, vendors, etc.) and so forth, will have a higher level of risk that something could go wrong, inviting law suits or other legal action. For these organizations, a corporation offers protection from liability for the nonprofit’s assets—both its people and its property. The corporation is also a permanent entity that can continue to exist and operate, even after the founding group moves on. For more, look at this Comparison of Unincorporated Association with Corporation.

Unlike an unincorporated association, a corporation can own property and make contracts (think of leases, insurance, and vendor agreements, for instance). It can conduct financial activities in its own name. Corporations are also well understood by the agencies that will interact with the nonprofit—the IRS, state agencies, the courts.

When deciding on the legal structure of your nonprofit, you should also consider disadvantages. The things that make a corporation attractive can also be disadvantages. For instance, a nonprofit corporation, once formed, is permanent. In Massachusetts, this means it can only be dissolved by court order. Thus, if you’re not sure you want to do this work for the long term, forming a nonprofit corporation right away may not be the best option.

Corporations must also adhere to corporate formalities—certain activities that must always be carried out to ensure the entity’s legal existence. These include having a board of directors that meets regularly, maintaining corporate records (such as board meeting minutes), using the corporate name correctly, maintaining a corporate bank account, and the like. (Take a look at our Checklist of Corporate Formalities.) If you’re not willing to commit to these activities, forming a nonprofit corporation may not be the right path for you.

The foregoing is provided for information and educational purposes only and does not constitute legal advice. Consult an attorney or accountant for advice regarding your organization’s specific situation.

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