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Mr. Dighe 

Starting a Non Profit Entity

Non-profit organizations are as important as a profit-motive organization as they form an pertinent part in the welfare and growth of human society. They are a legal entity with the single motive of ensuring justice and equality in a society. They are widely present in the domain of  arts, culture, science, sports, religion and for undertaking any other permitted activity without a profit motive. NPO's are generally conceived by few group of people coming together for the promotion, support, growth or highlighting a common cause or concern which may have social ramifications.

IRC 501 (c) (3) defines such organizations and deals with exemptions from income tax on the contributions received by such charitable institutions. It must be noted that this exemption is available only upon exclusively pursuing a specified set of activities and certain activities such as political campaigning, influencing or lobbying for legislation etc, are not included.

They can hire employees and administrative staff, but are limited in the amount of expenses and resources they can allocate to for any purposes other than furthering their exempt purpose.

They do not issue shares of stock and members may not receive personal financial benefit from the organization's profits, other than salary as an employee and are not personally liable for any debts or obligations the organization may incur.

Every exempt charitable organization is classified as either a public charity or a private foundation.

Public charities -

  1. Churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities,
  2. Have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities
  3. Receive income from the conduct of activities in furtherance of the organization's exempt purposes, or
  4. Actively function in a supporting relationship to one or more existing public charities.

Private foundations – in contrast, typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.

Following are a few broad steps for starting a 501 c3 nonprofit organization (NPO).

Step 1:

Statement of mission -. It is essential to define in a prepare a statement of mission/purpose the very purpose of the organization, the philosophy or idea behind its formation and the reason for its existence and continuance.

Step 2:

Board of Directors – A NPO needs to be administered by a group of qualified people which have common beliefs and goals and who are willing to devote the time and resources for working towards the common cause or mission as stated above. It will be a value addition to the board members holding strong qualification in varying disciplines such as Bookkeeping, finance, law, technology, public administration  etc. There are provisions on minimum [usually three] number of directors in each NPO and this is decided by legislations issued by the states.

Step 3:

Articles of Association.  Articles of association contain the objective to be pursued by the NPO, its formation, rights, responsibilities and obligations of the board members and rules for functioning and administration. When setting up a nonprofit organization, this document should be registered with an agency nominated by the State. Besides the foregoing, the Articles also contain provisions that distinguish members of the NPO from itself, thereby making the organization.

Step 4:

Acquiring status as a 501c3 NPO.  There are 501c3 requirements that must be met. Every NPO desirous of having its contributions exempt from tax under the IRS Code is required to register with the appropriate agency, normally the local office of the IRS. Pay the necessary filing fees, submit appropriate forms, documents, declarations and other relevant information – fees depend on the budget of the NPO. There may be exemptions under state and local laws as well, which will require a separate 501c3 application process. 501c3 organizations take some work to establish, but the filing status can be helpful come tax time.

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