Community Economic Development

Nonprofit Organizations

Authored By: Nevada Legal Services, Inc. 

What is a 501(c)(3)?

• • 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)?

• • • 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

Who is eligible for 501(c)(3)?

• • • 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.

What responsibilities accompany 501(c)(3) status?

• • • 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.

General Steps to Becoming a 501(c)(3)

• • • 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

Nonprofit Organization Handout

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Small Business Entities

Authored By: Nevada Legal Services, Inc. 

Business Entities

Why does it matter what entity my business is?

• • • 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.

Different types of business entities available

Sole Proprietorships

• • • 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.

Partnerships

General Partnership:

• • • “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.

Corporations

• • • 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.

Limited Liability Company (LLC)

• • • 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.

S-Corporations

• • • 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.

501(c)(3) Nonprofit Organizations

• • • 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.

Small Business Entities Handout