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Advantages and Disadvantages of Non-Profit Status

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Advantages and Disadvantages of Non-Profit Status

What are the advantages of nonprofit and tax-exempt status?

For nonprofit status:
  • If you want to assume fiduciary responsibility for all of the funds and to contract directly with the state, you will need to be an incorporated nonprofit organization.
  • As an incorporated nonprofit organization, you'll be able to take advantage of reduced postal rates for many purposes.
  • And, as an officially recognized nonprofit, you can apply for federal tax-exemption, which leads to many more advantages.
For federal tax-exempt status:
  • You are freed from many taxes.
  • Potential donors can make tax-deductible contributions. The latter is a powerful advantage for many groups who survive mainly on contributions and grants.
  • You can apply for grant funds directly. Almost all foundation or government grants require evidence of federal tax-exempt (501(c)(3)) status.
What are the disadvantages of nonprofit and tax-exempt status?Although applying for official nonprofit and tax-exempt statuses can be very helpful, there can also be some disadvantages to doing so. They include:
  • Incorporation creates another level of complexity, responsibility, and regulation that a volunteer-based organization may not be prepared to handle. For example, your organizations must send an annual tax-return to the IRS.
  • Filing for incorporation and tax-exemption takes time and money. For example, at this writing (in 1998) the fee for filing for federal exemption is $500 for most groups, and $150 in a limited number of cases. Fees for tax advisors (legal and accounting) can also be substantial.
  • For a group in the very beginning stages, incorporation and tax-exemption may not be necessary. It's often best to focus on doing the work, and developing a track record of success. Incorporation and related issues can become a distraction; they can be taken up later.
  • Incorporation and federal tax-exemption may limit certain lobbying and advocacy activities. For example, you cannot (as an organization) support candidates for public office.
  • The community may perceive creating another nonprofit organization as an additional level of bureaucracy.
  • Tax-exempt organizations are taxable, to the extent that they participate in activities unrelated to the performance of tax-exempt functions. While this isn't exactly a disadvantage, it is something you should take into consideration.
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