“I’m Incorporated, Now I Need To Be Tax Exempt….Right?”

Today I was talking with a woman who wants to found an organization, that educates young girls, in the near future. Planning out all the necessary steps the EIN was covered, she worked through the steps of  incorporation and began asking me questions about the next natural  step; filing for her tax-exemption status.

And while I was listening to her, I found the assumption that tax exemption was the only next step intriguing.  I understood it. After all, when most people think not-for-profit they think 501(c)(3). And though there’s nothing wrong with this, I thought there had to be instances in which tax exemption could be the next step but not necessarily the right one. In fact, perhaps there were instances in which a tax exemption status wasn’t even beneficial?

After some light thinking, I came up with a few disadvantages to obtaining a 501(c)(3) status. By applying for one:

  • Organizations usually have to adhere to many of the formalities of a corporation. Meaning annual reports and other cumbersome efforts such as quorums have to be followed.
  • Special tax returns and forms must be filed for any unrelated business income.
  • An immense amount of transparency is required. The tax exemption application is up for public view as well as annual tax returns and at times the books and records.
  • Organizations are limited in the amount of legislative activities they can partake in.
  • Organizations must familiarize themselves with all the other requirements involved with keeping to the exempted purpose.

There may be some organizations for whom these limitations may not be an issue. But some organizations may find them entirely too onerous for what they are trying to achieve. In terms of alternatives, there are admittedly few but:

  • There are certain formation structures organizations can choose where they would not be responsible for taxes.
  • Organizations could operate as a cooperative.
  • Leaders could keep track of deductibles and operate in a way that doesn’t leave the organization liable for taxes.
  • Or organizations could operate as a for-profit.

This is not to say organizations should necessarily fight the man and always seek an alternative. I would only caution founders to at least ponder other options before running for the 1023.

Please <a href=”http://twitter.com/?status=Retweet+Anywhere+for+WordPress+http%3A%2F%2Fkovshenin.com%2F” title=”Retweet This Post” rev=”&quot;Reading:” rel=”2184″>”retweet</a>