Creating a Nonprofit Corporation

Choice of Entity
In forming a nonprofit organization, the first decision, that will become the basis for all future transactions, is the choice of entity. A nonprofit organization is required to define the organization as unincorporated, incorporated or as a limited liability company. This decision may be based on the future expectations of the organization.

An unincorporated nonprofit organization includes the sole solicitation of contributions or the dissemination of information. This description could include a charitable trust.

The incorporated nonprofit organization or nonprofit LLC should be considered if the organization will acquire assets such as buildings, equipment or vehicles to be used in the delivery of services or if it will be necessary to hire employees to render services.

Establishing a Nonprofit Corporation
Filing Articles of Incorporation:
When forming a nonprofit organization, there is a strict procedure that must be followed to assure that the organization can operate as a full-fledged company. To start, a nonprofit organization must file articles of incorporation with the Ohio Secretary of State. Filings cost $125 and can be expedited for an additional $100. A Filing Reference Guide is available.

The articles of incorporation include a purpose statement, names and addresses of at least three natural people who will act as initial directors of the corporation and the location of the principal office. The documents must be signed by the incorporators with names printed or typed beneath. A statutory agent must be chosen and accept the position for service of process.

In addition to the articles of incorporation, a code of regulations must be made, similar to the constitution for an unincorporated organization. The document will set forth all rules and regulations for the governing of the organization, duties of officers and trustees, rights of members and fees or dues for members.

As with unincorporated associations, the statement of purpose must be carefully thought out. The statement of purpose must adhere to strict standards to receive the tax-exempt status and meet funding standards. Similarly, qualifications of members and trustees should also be defined with care.

The corporation is not required to have an ending such as Inc. or Corp. Every five years a statement of existence must be filed by the statutory agent. The Secretary of State’s office will notify the statutory agent when the time comes to refile. Failure to refile will result in the cancellation of a corporation’s articles. The associated filing fee is $25.

In accordance with IRS publication number 557, "Tax-Exempt Status for Your Organization," organizations must include similar wording to ensure the tax-exempt status. This publication can be obtained by writing to the IRS Forms Distribution Center, PO Box 8903, Bloomington, Illinois 61702-8903 or calling their office at (800) 829-FORM. If your organization is not filing for tax-exempt status, this does not apply.

Fiduciary Responsibility:
A nonprofit organization must entrust at least one trustee with the fiduciary responsibilities and all duties and obligations associated with it. These responsibilities include all legal and monetary issues of the organization. The trustee will meet all standards of good faith and honest business practices—the same principles that any other corporation must uphold. This trustee will be responsible to meet all standards required of him or her by law or be subject to personal liability. A trustee cannot avoid his or her responsibilities through non-management, by not attending meetings and by ignoring the affairs of the organization.

A trustee who acts in good faith cannot incur personal liability even if poor judgment causes loss or injury to the organization. According to Ohio Revised Code Section 2305.38, the individual of a "charitable organization" who does not receive compensation for his or her services will not be held personally liable in damages for actions or omissions in connection with any supervisory or corporate services that he or she performs for the charitable organization unless (i) the act or omission of the trustee constitutes willful or wanton misconduct or intentionally tortious conduct, or (ii) with the prior knowledge of a wrongful act or omission by an officer, employee or other trustee of the corporation, the trustee authorizes, approves or otherwise actively participates in that action or omission.

Corporations may agree to cover a trustee that is made party to a lawsuit if the trustee acted in good faith. The corporation must relieve the trustee of all expenses and liabilities associated with the lawsuit if he or she successfully defends himself or herself in court.

Liability Insurance:
Nonprofit organizations are not immune from being sued. A nonprofit organization has entered into a legally binding contract just as any other entity. Therefore, the organization is liable for its officers, trustees, employees and organization as a whole.

Liability insurance is available to nonprofit organizations. Insurance can be purchased to cover officers, trustees, employees and volunteers. If providing services to the public, liability insurance is a must. All activities should be thoughtfully planned in consultation with an insurance agent.

Please refer to Ohio Revised Code Section 2305.38 for more information as it grants limited liability to certain non-paid volunteers.

Obtaining Tax-Exempt Status
Internal Revenue Service:
Nonprofit organizations are formed to provide charitable work. The Internal Revenue Code recognizes more than 20 types of tax-exempt entities, and each exemption has its own advantages and disadvantages. Organizations may also set up affiliated trusts, foundations or nonprofit corporations to accept contributions or hold real estate. These entities can yield certain income tax advantages.

The forms required to receive tax-exempt status are lengthy, complicated and ask for detailed information about the organization. Consult a tax advisor to make the best possible choices and for assistance with application filing.

Annual Filings with IRS and State of Ohio
Nonprofit organizations are required to file an annual tax return. The organization should consult with a tax adviser, although general rules apply as follows. If, as typically the case, no taxes are due, form 990 should be filed. The organization may have to pay income tax on profits derived from commercial activities as outlined under the Unrelated Business Income Rules.

As a general rule, nonprofit corporations are not subject to the Ohio franchise tax. However, unless the organization qualifies as a church or charitable organization, it must pay Ohio sales or use tax on purchases.

Many exemptions from sales or use tax exist, and organizations should take the time to determine which apply to them. Organizational suppliers will require completed exemption forms at the time of purchase. Blank forms can generally be obtained from business supply stores. Nonprofit organizations that make sales must obtain a vendor’s license and collect Ohio sales tax. As always, sales tax statutes should be consulted if the organization only makes occasional sales, for those sales may be exempt from the sales tax.

The organization may be required to pay real estate tax on owned property. If the organization believes it qualifies for an exemption, it should file an application for such with the tax commissioner. Personal property is not subject to tax unless use for commercial purposes.

As defined in the section of this brochure entitled "Responsibilities as an Employer," nonprofit organizations are required to make certain annual filings if they have employees.