Generally speaking, a non-profit corporation is a tax free business established for a community benefit. It is not a for profit C-corporation, and it does not have shares of ownership. It does, however, have a board of directors and bylaws. If you want to engage in a business that is for the public benefit, and if you would like to be treated as a tax free entity, you should consider a non-profit (not for profit) status.
There are many categories of 501(c) non-profit corporations. If a company falls into any of the categories of a 501(c) tax status under the tax code, it will not be a taxed entity.
The most favored type of 501(c) entity is a 501(c) (3). This is also not a taxed corporation. A 501(c) (3) also has the advantage that contributions by individuals and businesses to the entity are tax deductible. In other words, if someone is donating to a company, and the company is a 501(c) (3), then the donation can be written off on the donor’s taxes. No other form of entity has that advantage.
In order to form a non-profit entity in Colorado, you would likely want to take the following steps:
- File to establish your non-profit corporation with the Colorado Secretary of State’s office. This can be done online. The filing should be for a non-profit entity as a corporation.
- After the entity is created, the founder or founders must file for the applicable tax exempt status with the federal government. Historically, this would require the filing of a form 1023, which is a lengthy and detailed form concerning all activities of the organization and information concerning the founders. More recently, the IRS has released a short form for those who qualify. This has made filing very easy, and the wait time for IRS approval is dramatically shortened. You might want to work with your accountant and/or attorney to make sure that you file the correct form for your organization, and that you have received tax exempt status with the government.
- Draft bylaws for the organization. These will be adopted by the Board at the first meeting.
- Assemble a Board of Directors. These will be the volunteer individuals who make the ultimate decisions concerning the business of the non-profit.
- Conduct your first meeting, and comply with all applicable laws concerning the start of the organization, including meeting minutes and voting procedures.
One of the most common misconceptions for non-profits is that someone can create the non-profit, work the non-profit as a salaried employee, and run the non-profit as a sole director. This would violate the non-profit status. If someone is going to establish and work the non-profit as a salaried employee, that individual should be ready to recognize that other people will form the board of directors and will oversee the non-profit. The board can hire or terminate any paid employee, including a founder, at any time.
In forming a non-profit, it is important to work with competent legal counsel and a qualified accountant. It is important to obtain the correct tax status to avoid liability and ensure that there are no tax issues. Additionally, it is important to have the correct corporate documents in place, including bylaws and corporate minutes. Most importantly, it is important to conduct activities in a way which does not violate any non-profit requirements.