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Tax-exempt status for nonprofit organizations

On Behalf of | Jan 18, 2024 | BUSINESS & COMMERCIAL LAW - Business Formation & Planning |

One of the major benefits of running a non-profit is that it may qualify for tax-exempt status. Employees still have to pay taxes on their wages, but the business itself will not have to provide income tax payments for money – or other assets – that have been donated. 

Additionally, if the business is tax-exempt, then contributions made to it may be tax-deductible. Many people give to charities and other such organizations specifically because they want to write it off on their taxes. In this way, they lower their tax burden and get more say in how their money is used. But, in order to make use of this situation, your organization needs to be set up properly. 

How does federal law define a charity? 

The federal law refers to these types of organizations as “501(c)(3) public charities.”  These organizations are officially established as tax-exempt by the IRS. 

What legal structure is needed?

The IRS will only recognize that an organization is tax-exempt if it is an association, a corporation or a trust – at least in most cases. There are some potential exceptions to this rule for unincorporated associations. However, becoming tax-exempt with this structure could mean that volunteers are at risk of being legally liable. As such, this structure is typically not used, except in rare cases. 

Setting up your tax-exempt organization

It’s very important to have the right business structure and to take the proper official steps to define your business as tax-exempt with the IRS. This can be a complex process, so it’s crucial to know exactly what legal options you have.