Community Economic Development
Nonprofit Organizations
Authored By: Nevada Legal Services, Inc.
What is a 501(c)(3)?
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- A 501(c)(3) is a nonprofit organization that is exempt from federal income tax and possibly state property and sales/use taxes.
- Nonprofit organizations are either public charities or private foundations. The Internal Revenue Service presumes that all 501(c)(3) organizations are private foundations until each organization demonstrates that they qualify as a public charity.
- Public charities typically are supported by broad public financial support.
- Private foundations are typically used when there are a small number of donors or the income to the organization is derived from investment income.
- In addition, contributions made to such nonprofit organizations by individuals and other entities are deductible from their taxable income.
Why apply for a 501(c)(3)?
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- Benefits of having 501(c)(3) status:
- Exemption from federal income tax and eligibility to receive tax-deductible charitable contributions.
- Likely increase in donations, as individuals and corporate donors can possibly have their donations be tax deductible.
- In some cases the organizations can be exempt from state and local property, sales and use, and franchise taxes.
- Reduced postal rates
- Eligibility for many state and/or federal grants
- Benefits of having 501(c)(3) status:
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Who is eligible for 501(c)(3)?
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- A nonprofit organization must be “organized” and “operated” exclusively for one or more “exempt purposes”
- “Organized” means set up as either a corporation, trust, or unincorporated association under applicable state law.
- “Operated” looks at the actual activities of the organization. It is required that the organization be operated exclusively for charitable purposes.
- “Exempt Purposes” under Section 501(c)(3), the Internal Revenue Code lists the following exempt purposes: charitable, educational, religious, which are the most common types, as well scientific, literary, fostering national or international sports competition, preventing cruelty to children or animals, and testing for public safety.
- Anyone can form a nonprofit. There are no age, residency, or other legal requirements.
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What responsibilities accompany 501(c)(3) status?
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- Though 501(c)(3) status benefits organizations, federal law does impose additional responsibilities on exempt organizations that non-exempt organizations are not required to follow.
- Recordkeeping is required of Section 501(c)(3) to keep books and records detailing both financial and nonfinancial activities.
- Filing Requirements of Form 990 with different schedules may be required on an annual basis.
- Under the IRS’s disclosure requirements, nonprofit entities must make both annual information returns and their tax exempt application Form 1023 available/accessible to the public upon request and without charge.
- Failure to comply with the IRSs requirements will result in loss of tax-exempt status.
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General Steps to Becoming a 501(c)(3)
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- Draft and file Nonprofit Articles of Incorporation with the Nevada Secretary of State
- Prepare and file Form SS-4 with the Internal Revenue Service (IRS) to obtain an Employer Identification Number (EIN)
- Open bank accounts in the nonprofit organizations name
- Draft the organization’s bylaws
- Prepare and file Form 1023 or Form 1023 EZ with the IRS
- Wait for Determination Letter from the Internal Revenue Service
- Obtain Nevada State Sales/Use Tax Exemption
- Register with State Attorney General
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Nonprofit Organization Handout
Small Business Entities
Authored By: Nevada Legal Services, Inc.
Business Entities
Why does it matter what entity my business is?
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- Each different business entity listed above has advantages and disadvantages. Each varies drastically when it comes to an owner’s personal liability, taxes, control, investments, income, and complexity.
- All such factors need to be looked at when trying to determine which business entity is right for you and enables your business the most advantages.
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Different types of business entities available
Sole Proprietorships
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- Most common business organization.
- Easy to form, no formation documents required with the Secretary of State’s office.
- Offers complete control to the owner.
- Business’ profits and losses are carried through to owner’s personal income.
- However, the owner is personally liable for debts incurred by the business.
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Partnerships
General Partnership:
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- “An agreement, expressed or implied, between two or more person who join together to carry on a business venture for profit.”
- Easy to form, no formation documents required with the Secretary of State’s office.
- Each partner shares in the profits and the losses of business.
- Profits and losses are “passed through” to the partners to report on their individual tax return.
- However, each partner is personally liable for the debts of the business, even debts incurred by the other partner in the business’ name.
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Corporations
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- A corporation is a separate, legal entity from those stockholders who formed it.
- More complex than other business structures due to higher administrative, tax, and legal requirements.
- Formed under Nevada state law
- Corporations provide owners to have limited liability from the corporation’s debts.
- A corporation can enter into contracts, incur debts, and pay taxes apart from its owners.
- Ability to generate capital through sale of their stock.
- In some cases, corporations are taxed twice. First, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns.
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Limited Liability Company (LLC)
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- Hybrid entity that allows the operational flexibilities and tax treatment like a partnership, while also providing the limited liability features of a corporation.
- Owners of an LLC are referred to as “members.”
- Typically, LLCs are not taxed as a separate entity. Profits and losses flow-through the business to the members of the LLC to report on their individual income.
- Less recordkeeping, registrations, and start-up costs than a corporation.
- However, an LLC does pass on self-employment taxes to its members.
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S-Corporations
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- An S Corp is a legal entity that operates under state law.
- An S Corp is a corporation that has elected a special tax status with the IRS that can eliminates the double-taxation that typically occurs with other corporations.
- Members of an LLC are subject to employment tax on their entire net income of the business, while only wages of the S Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a “distribution” and taxed at a lower rate.
- Provides limited liability to stockholders.
- Higher formation and ongoing expenses than some other business entities.
- An S Corp can have only one class of stock and not more than 100 shareholders.
- Closer scrutiny from IRS due to classification of income by business and its shareholders.
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501(c)(3) Nonprofit Organizations
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- Organizations that meet criteria under the Internal Revenue Code 501(c)(3) are eligible for federal and state exemption of corporate income tax.
- Once an organization has obtained 501(c)(3) status from the IRS, charitable contributions made to the entity are tax-deductible.
- Nonprofit organizations are allowed to solicit charitable donations from the public.
- Separate legal business entity that provides limited liability to the nonprofit’s Directors, Officers, employees, agents, etc.
- However, creating a nonprofit organization typically takes more time, effort, and money than other business entities.
- Nonprofits are required to keep detailed records and submit annual filings to the state and to the IRS in order to stay in compliance.
- Public has a right to see the nonprofit’s finances and other business documents.
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