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  1. #1
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    Jun 2013
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    Default Starting a Nonprofit Corporation Without Seeking a Tax Exemption

    My question involves business law in the state of: Texas

    Two associates and I have formed a nonprofit which has been recognized by the Texas Secretary of State, and we now need to obtain an EIN in order to open a bank account and, later, to file income tax paperwork.

    This nonprofit organization was formed for the express purpose of arranging for, promoting, and managing fund-raising events to benefit one specific established 501(c)(3) organization. We do not work for this 501(c)(3), and are not allowed to organize events as volunteers directly for them (per their rules). However, the 501(c)(3) will give us a license to use their name and allow us to issue receipts to donors in their name provided our finances are reported to them and are completely transparent. We are happy to do this, but of course we formed the nonprofit corporation to protect ourselves individually, and to avoid any personal tax liability.

    Given the above, we do not intend to apply for 501(c)(3) status for our nonprofit, although we recognize that even though we pass through all income (less expenses) to the 501(c)(3) we are working to benefit, we will still owe a certain amount of income tax because we can't deduct 100% of the contributions. We believe it is worth that price to avoid the pain of applying for and maintaining the tax-exempt status for ourselves. (The 501(c)(3) we are working with agrees and accepts that we will have income tax as an expense.)

    The question is: On the SS-4, Line 9(a), we need to declare the "type of entity" we are. Our inclination is to declare as "other nonprofit organization" but there is a requirement to "specify" if we do so. Is "other nonprofit" the correct choice in our case, and what do we "specify"? Also, on Line 10 "Reason for applying", is it simply "Started new business" or is "Banking purpose" more correct?

    Thanks in advance for any advice!

  2. #2
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    Mar 2013
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    Default Re: Starting a Nonprofit Corporation Without Seeking a Tax Exemption

    You are not a "non-profit" of any kind under IRS rules unless you are designated as such by the IRS.

    It might be your intent not to make a profit, but that's not what the form is asking.

    Consult a tax pro to make sure you are completing the form correctly.

    The money you pay for professional advice now will be a fraction of the tax consequences you'll face if you get it wrong.

  3. #3
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    Default Re: Starting a Nonprofit Corporation Without Seeking a Tax Exemption

    Your state will allow you to form a nonprofit corporation if you meet the legal requirements for forming such a company. The mere fact that it is nonprofit does not mean that it enjoys any form of tax-exemption.

    The form comes with instructions, which appear to answer your questions quite clearly.

  4. #4
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    Jun 2013
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    Default Re: Starting a Nonprofit Corporation Without Seeking a Tax Exemption

    Thanks to adjusterjack and Mr. Knowitall for your responses.

    It is my understanding that there's a distinction: States designate nonprofit status and the federal government (IRS) determines tax-exempt status. Not all nonprofits qualify to be tax-exempt. Incorrect? (We've already qualified as a nonprofit in our state, having met the legal requirements.)

    What is one to conclude after reading the SS-4 instructions under Other Nonprofits: "If the organization also seeks tax-exempt status you must file either Form 1023 or Form 1024."? Doesn't this imply that an organization can be an Other Nonprofit without seeking tax-exempt status?

    Agreed, probably best to consult a tax pro at this point.

  5. #5
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    Default Re: Starting a Nonprofit Corporation Without Seeking a Tax Exemption

    Whether or not you qualify as a nonprofit corporation under your state's law is, quite obviously, a matter of state law.

    Whether your nonprofit corporation will qualify for various state, local and federal tax exemptions is a separate issue.

    As you have now twice been told, the mere fact that a corporation is nonprofit has nothing to do with whether it has sought or obtained a tax exemption. If it truly needs to be said, a nonprofit corporation that is not seeking tax-exempt status would not have to file documents indicating that it is seeking tax-exempt status.

  6. #6
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    Mar 2013
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    Default Re: Starting a Nonprofit Corporation Without Seeking a Tax Exemption

    Read the instructions:

    http://www.irs.gov/pub/irs-pdf/iss4.pdf

    I think you are getting bogged down in the non-profit issue when it's simpler than that.

    If you are not incorporated you are either a sole proprietorship or a partnership.

    If you are an LLC it appears that you are a disregarded entity (if single member) or a disregarded entity - partnership (multiple members).

    That's my guess, anyway.

  7. #7
    Join Date
    Jun 2013
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    Default Re: Starting a Nonprofit Corporation Without Seeking a Tax Exemption

    Quote Quoting Mr. Knowitall
    View Post
    As you have now twice been told, the mere fact that a corporation is nonprofit has nothing to do with whether it has sought or obtained a tax exemption.
    I've acknowledged that distinction in my reply, but that wasn't my question.

    Thanks much to both of you for your time.

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