This post represents the unedited version of an answer I recently posted on Linkedin®:
Hotep. I believe far too many entrepreneurs overlook forming a nonprofit organization when determining the best legal structure for their new concern. Having said that, the best way of selecting the right type of entity, i.e. how to operate, comes from examining the issues of Control, Liability and Taxes against the proposed business model. But since we are already talking 501(c)(3) organizations, I will do my best to set forth what I believe to the be the key elements to starting one, which include: 1) Understanding section 501 of the Internal Revenue Code; 2) Incorporation; and 3) Fundraising.
Understanding IRC § 501:
Section 501 of the Internal Revenue Code [IRC] provides the rules for establishing and operating a federally tax exempt organization. An entity applying for exemption under § 501(c)(3) must file IRS Form 1023. The US Internal Revenue Service [IRS] will make a determination as to whether or not the entity meets the organizational test for receiving the 501(c)(3) status. The primary factor involved in this determination becomes the entity’s purpose. In order for an organization to receive 501(c)(3) status, it must be “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals … .” 26 USC § 501(c)(3). If an organization does not pass muster with regard to the IRS organizational test, its organizers may elect to seek exemption under another category of § 501(c) like 501(c)(4) or (c)(6). Keep in mind, however, that it may take the IRS up to one (1) year or more to render a 501(c)(3) determination.
Additionally, because of the tax exempt status, many people believe that nonprofits are otherwise barred from making money. Nonprofit organizations can engage in commercial ventures but not for the sole purpose of turning a profit; furthermore, nonprofit organizations can also own for-profit subsidiaries; however, the income derived wherefrom may fall outside of the parent’s tax exemption but not always. Notwithstanding, certain absolutes do exist under § 501 and other applicable provisions of the tax code. Only a 501(c)(3) organization that is not a private foundation under § 509(a) can offer contributors—i.e. donors—a tax deduction. Furthermore, a 501(c)(3) organization can engage in neither lobbying activities nor endorsing candidates for political office.
Incorporation:
Nonprofit organizations, also known as not-for-profit corporations, can take the form of a non-stock corporation or an unincorporated association. Nonprofits generally take the form of non-stock corporations for two reasons: 1) Under the provisions of IRC § 501, while a nonprofit may provide salaries for employees, no part of the net earnings of a nonprofit organization may inure to the benefit of any organizer, board member or supporter; and 2) Incorporation provides limited liability protection to the employees, board members and other agents of the company. Please note that for the purposes of IRC § 501, an unincorporated association does not pertain to a partnership or a limited liability company. An unincorporated association under this statue takes the common law definition, being a group of individuals who operate a venture as a collective of sole proprietors; therefore, in this instance, the association itself does not take on any separate legal status. In order to establish the legal entity, the organizer(s) must file Articles of Incorporation with the proper state agency charged with overseeing corporate registration in the jurisdiction wherein they wish to operate. Additionally, unlike other corporations, most jurisdictions—i.e. a state or US territory—require a nonprofit be governed by a board of directors comprised of not less than three (3) individuals.
Fundraising:
Capitalizing a nonprofit organization can be somewhat easier than raising capital for a for-profit entity. Funding a nonprofit involves attracting the right combination of money and in-kind contributions which take the form of expertise—i.e. pro bono services—or property. For the most part, nonprofits rely on public contributions—i.e. government or private grants and donations—and large gifts from private foundations or wealthy individuals. In fact, the most reliable source of fundraising in this country is contributions received via direct mail campaigns. Most grant-making agencies will require that the nonprofit be recognized by the IRS as a 501(c)(3) organization or use another, more mature nonprofit as its fiduciary agent. At the end of the day, people and corporations alike give more readily to those organizations bearing a mission with which they can identify or promotes an interest they support.
The better part of my professional life has been spent in various social entrepreneurial endeavors. Not only do I find the work to be rewarding, the business aspects of growing a social enterprise can present challenges myriad enough to hold the interest of the most prolific of entrepreneurs. I other words, I really dig what I do J I apologize for the lengthy answer, but I hope this helps. Take Care!
Disclaimer: The foregoing information is intended to be used for educational purposes only and cannot be used as or construed to be legal advice. Please consult an attorney licensed in the jurisdiction in which your concern is located for specific advice on the legality of statements made above.


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