What Does Nonprofit
Incorporation Mean?
Why Incorporate?
Is Incorporating As a Non-Profit Appropriate?
Who Can Incorporate an Organization?
Steps to Incorporation
Articles of Incorporation
Tax Exemption
Advertising
Additional Information
At some stage almost every volunteer group considers incorporating
as a nonprofit. This booklet will help you decide if incorporation
is right for your organization.
What Does Nonprofit Incorporation Mean?
Incorporating is a state process. Nonprofit corporations are
independent organizations that have a public-oriented purpose,
defined by state law. They are different from for-profit corporations
because they must spend their funds to fulfill the organization's
lawful purpose. Funds cannot be used to personally benefit members.
Even though they have nonprofit status, some nonprofit corporations
are large organizations with multi- million dollar budgets.
Nonprofits are clearly recognized by law as responsible and
permanent organizations. They can be held liable for damages
in the same way that an individual can. In contrast, unincorporated
associations are more loosely organized and their members can
be held personally liable for the actions and debts of the association.
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Why Incorporate?
There are several advantages to incorporating your organization
as a nonprofit:
- Formal Organization: Incorporated organizations must adopt
more formal operating procedures. For example, board members
must follow the organization's by-laws, hold regular meetings,
maintain minutes, and keep the state informed of changes in
board officers.
- Name Protection: The incorporation process registers and
protects the organization's legal name.
- Tax-exemption: Becoming a nonprofit organization is a required
first step to applying for tax-exempt status from the federal
government. Becoming incorporated is not the same as becoming
tax- exempt. Getting tax-exempt status is a separate application
process.
- Limited Liability: In most circumstances, regular members,
board members, and employees cannot be held personally liable
for a corporation's debts and activities. The corporation
itself is liable while members' personal funds and assets
are protected. However, members can be held liable for intentional
negligence and misappropriated funds.
- Institutional Recognition: Foundations, government agencies,
and banks are often more willing to do business with incorporated
nonprofits than unincorporated organizations. They recognize
nonprofit corporations as legally responsible and more likely
to meet their obligations. In fact, many institutions will
not do business with non-profit organizations unless they
are incorporated.
- Public Recognition and Credibility: The general public perceives
most nonprofit corporations as responsible, permanent and
active. It will be more likely to support a nonprofit corporation's
activities and programs. The media are more willing to publicize
incorporated organizations.
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Is Incorporating As a Non-Profit Appropriate?
Incorporating is not a good move for every organization. Small
organizations, with little or no funding and small-scale, infrequent
activities should think twice about incorporating. New groups
who are just getting started should focus energies on their
mission rather than incorporation. Growing organizations that
plan to hire employees, publicize their programs, obtain funding,
and carry out larger projects will almost certainly want to
incorporate as a nonprofit.
Here are some disadvantages to consider:
- Loss of Individual Control: Nonprofit corporations are run
by a board which elects officers. Decision making is often
by voting or through agreements reached at membership and
board meetings. Decision makers must take more time and compromise
with fellow members. Generally, this is a good thing. However,
if the strength, enthusiasm, and creativity of your organization
depends on one charismatic individual, consider how this will
change when he or she has to share the decision-making process
with several other people.
-
- Increased Paperwork: When an organization incorporates,
it becomes more regulated through its relationships with various
government agencies, foundations, and institutions. Consider
whether or not you can devote the time, energy, and patience
required to incorporate, seek funding, file tax forms, keep
minutes and financial records, etc.
-
- Increased Costs: In addition to the incorporation fee and
advertising costs, there are many small and large costs associated
with running a non-profit corporation. Insurance, document
filing fees, legal and accounting fees can quickly increase
an organization's costs.
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Who Can Incorporate an Organization?
In Pennsylvania, one or more persons can file to incorporate
an organization. They are called incorporators. Their responsibilities
include:
- Getting, completing, and sending the required forms with
fee to the Corporation Bureau in the Pennsylvania Department
of State.
- Drafting and signing the Articles of Incorporation.
- Holding an initial organization meeting soon after filing.
Incorporators elect first board members at this meeting. Incorporators
can become board members.
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Steps to Incorporation
- Obtain a Federal Employer Identification Number (EIN). The
is the corporate equivalent of a social security number. It
is not required to incorporate, but CTAC recommends that your
organization get an EIN first because it will need the number
to open bank accounts and file tax forms. See CTAC's
Do It Right Kit on EIN's.
- Get and complete the required forms from Pennsylvania's
Corporation
Bureau. You can obtain these forms and information from
CTAC or from the Bureau at (717) 787-1057.
DSCB
15-134A (Docketing Statement). This is the simplest
of the various forms required.
DSCB
15-5306 (Articles of Incorporation - Domestic Nonprofit
Corporation). This is a "fill in the blanks" Articles
of Incorporation form on which you provide specific information
to the Corporation Bureau. Do not confuse the Articles
of Incorporation with Bylaws. Articles contain the bare
bones items necessary to incorporate. The Bylaws must
be consistent with the Articles but typically provide
much more information. Consult an attorney if you do not
use the form. It is not necessary to notarize your Articles
of Incorporation.
DSCB
17.2 (Consent to Appropriation of Name) or DSCB
17.3 (Consent to Use of Similar Name). Complete these
forms only if your organization plans to take over the
name of another organization or plans to use a name that
is similar to another organization's name. If your organization
has an original name, you do not need to complete these
forms.
To find out if your organization's name is already being
used by another organization, contact the Corporation
Bureau. They will check to see if your name is already
in use by another organization. There is no fee for this
service via the web or by phone. If you go through the
mail, there is a fee.
- If you can, have a lawyer experienced in nonprofit law review
all documents before you send them to the Corporation Bureau.
You are not required to have a lawyer prepare your Articles
or forms, but he or she will be able to point out any errors.
Many attorneys will perform this service for a nominal fee
or at no cost.
- Mail completed forms to the Corporation Bureau with the
required fee. Call the Bureau for the current fee.
- After reviewing your forms, the Corporation Bureau will
send you a copy of your Articles of Incorporation with the
signature of the Secretary of State, date, an entity number,
and microfilm number at the top. This is the only confirmation
that your forms have been successfully filed. This is a vitally
important organizational document that you must keep on file.
Do not lose it.
If there is any problem with your forms, the Corporation
Bureau will return your forms and the fee. They will inform
you of any changes you must make before resubmitting your
application.
- After incorporation, the organization must update the Corporation
Bureau about any changes in the organization's board officers
using form DSCB
15-5110 (Annual Statement-Nonprofit Corporation). You
do not need to file this form if there have been no changes.
There is no fee to file.
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Articles of Incorporation
The Articles of Incorporation is the document that "creates" a
corporation. It describes its mission and declares that it will
operate according to Pennsylvania's Nonprofit Corporation Law.
The Corporation Bureau has a fill-in-the-blank form which you
can use, which includes these minimum requirements:
- The full name and official address of the corporation. You
must use a street address–the Corporation Bureau will
not accept a post office box.
- A statement of purpose or Mission Statement. The organization's
purpose must be consistent with state law and for a public
purpose. If you intend to seek tax-exempt status from the
U.S. Internal Revenue Service, your purpose or mission should
be written to satisfy IRS requirements as well. (See section
on Tax Exemption below.)
- A statement that the corporation will not be run for profit.
Sample: The corporation does not contemplate
pecuniary gain or profit, incidental or otherwise.
- State that your corporation is formed under the Nonprofit
Corporation Law of 1988
- Whether or not there will be members other than the Board
of Directors.
- Names and addresses of Incorporators.
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Tax Exemption
You may have heard the term "501(c)(3). ("We're a 501(c)(3)" "We
only give to 501(c)(3)'s"). That is simply the section of the
Internal Revenue Code which defines non-profits which are exempt
from federal income tax and for whom contributions are tax deductible.
See CTAC's Do It Right! Kit on 501(c)(3) Tax
Exemption.
If your organization plans to apply for federal tax exemption,
you should write the Articles of Incorporation with this in
mind. To qualify for tax-exempt status, there are several additional
provisions that you should include when incorporating:
- A statement that profits or funds will not inure (be paid)
to any members. Of course, the organization can pay its employees
appropriate compensation.
Sample: No part of the Corporation's net earnings
will inure to the benefit of members, directors, or other
private persons except that the Corporation shall pay reasonable
compensation to staff for services rendered.
- A statement that if the corporation dissolves, its remaining
funds will be given to another tax-exempt organization according
to the requirements of section 501(c)(3) of the Internal Revenue
Code.
Sample: Upon dissolution of the Corporation,
assets shall be distributed for one or more exempt purposes
within the meaning of section 501(c)(3) of the Internal
Revenue Code.
- Be sure that your statement of purpose, or Mission Statement
is consistent with the IRS regulations for tax-exempt activity.
Your Mission Statement should briefly describe your purpose
and then add the following:
Sample: The Corporation is formed solely for
charitable and educational purposes within the meaning of
section 501(c)(3) of the Internal Revenue Code.
- A Statement that the corporation will not lobby extensively
or support or oppose candidates for public office.
Sample: No substantial part of the Corporation's
activities will consist of carrying on propaganda, or otherwise
attempting to influence legislation. The Corporation will
not participate in any political campaign on behalf of or
in opposition to any candidate for public office.
For more information on political activity and lobbying restrictions
on non-profits see our other Do It Right Kits.
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Advertising
After you receive your approved Articles of Incorporation from
the Corporation Bureau, your organization must advertise its
creation in two local papers.
In Allegheny County, the announcement must run in one issue
of the Pittsburgh
Legal Journal and in one issue of a local general circulation
newspaper, such as the Pittsburgh Post-Gazette, Pittsburgh
Tribune- Review or Pittsburgh Courier. Keep a copy
of each announcement from the newspapers in your minutes to
confirm that your organization advertised filing. The announcement
must include:
- The corporation name.
- A short statement of purpose.
- A statement declaring that the organization is incorporating
under the Nonprofit Corporation Law of 1988.
- The filing date.
The address of the Pittsburgh Legal Journal is: 400 Koppers
Building 436 Seventh Avenue Pittsburgh, PA 15219 (412) 261-6255
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Additional Information
You can find clear and simple directions about the steps to
incorporation on the forms provided by the Pennsylvania Corporation
Bureau.
Department of State
Corporation Bureau
206 North Office Building
Harrisburg, PA 17120
(717) 787-1057
www.dos.state.pa.us/corps
IRS Publication
557, Tax-Exempt Status for Your Organization explains
how to write Articles of Incorporation for organizations that
comply with IRS tax-exempt regulations. You can order IRS publications
by calling 1-800-829-3676, or go to the IRS's
Exempt Organizations web site.
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