Knowhow-Now Article

How To Come Up With The Right Nonprofit Business Structures

By Andrew Wilson

Andrew Wilson

These days, nonprofits abound, from a few individuals putting their ideas together to aid in short-term projects for their community, to well-established organizations helping millions of people all over the world. If you’re starting up a nonprofit and wondering how to get tax exemption, bear in mind that you need to have the right nonprofit business structures in place before you can qualify.


In the United States, for example, before you can apply with the IRS for federal exemption, you must first form as a nonprofit corporation in your respective state since nonprofit business structures highly depend on the federal and state regulations at hand.

Here’s a quick run through of what your organization needs to go through for you to have a smooth sailing and tax-exempt operations.

State Incorporation For Non-Profits

You need to meet all the requirements of the Internal Revenue Service for you to qualify in the tax exemption. Your organization must be a separate legal organization. It needs to be a foundation, corporation, or a community chest fund. Just like any business operation, your organization must incorporate its operation within its own state, instead of just being a group that awards grants or oversees funds.

The Internal Revenue Code section 501(c)(3)

The most favorable status you can apply for is the tax exemption under the Internal Revenue Code section 501(c)(3). In here, the donations made to your organizations are also tax deductible for your said donors. Some of the organizations enjoying this privilege are those having a religious, charitable, educational, literary, or scientific purpose. Other qualified groups are the following:

  • Those running soup kitchens
  • Those that defend civil and human rights
  • Art museums
  • Those promoting community development
  • Social clubs
  • Trade groups
  • Veterans organizations
  • Fraternal societies
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The Non-Profit Governing Board

All nonprofit corporations are required by the state to run under a board of directors, however, they do not have shareholders like those of for-profit corporations. The board is responsible for setting the organization bylaws and elects a chairman of the board. They can also hire their executive director if they choose to. Remember that the regulations under the Internal Revenue Service forbid the board members from getting benefits or income percentages coming from the organization.

The Non-Profit Executive Director

The role of the executive director is to plan and execute the activities of the organization he is serving since it is a paid position. He oversees the daily operations and management of his staff and owns a more visible role compared to the CEO of for-profit corporations. Aside from dealing with social and news media pertaining to the pressing issues affecting the organization, the Executive Director also meets and socializes with funders and donors, talks to government bodies both local and national, as well as with foundations that play a big role in awarding grants to his organization.

Nonprofit Manpower

Nonprofits must pay serious attention to this because their staff and volunteers play a big role in the success of their organization. More than policies or resources, the individuals within your group will be involved in make or break situations, so make sure the people you are assigning to specific and critical areas are highly qualified to meet the demands of the job. Don’t take your volunteers for granted either, and just because they are not paid, it does not mean they do not require proper training and instructions to be one with the nonprofit’s goals and mission.

Revenues

Many nonprofits still cringe at the thought of having to deal with this term. Truth be told, nonprofit business structures cannot survive if you do not find ways to earn a steady income to rise above your expenses. Even if your organization mainly spends on services to attain your goals, you also drain a big portion of your resources trying to apply for fund-raising events, grants, and donations. So to add to your income, you can charge minimal fees to benefits, museum admissions, or concerts. Just be careful that your operations do not fall out of your exemption because then you will be subject to taxes.


Just like any business operation, your organization must incorporate its operation within its own state, instead of just being a group that awards grants or oversees funds.

find out what you need to do, exactly

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