# Nonprofit Incorporation and Tax Exemption
## Incorporation and Its Impact
The answer is yes! However, different corporate entities have varying tax rules and regulations. Often the benefits of incorporating outweigh the disadvantages. For a nonprofit that expects growth, it's important to get tax exemption in place as soon as you can.
Incorporation simply means that a group of people with a common goal has decided to formalize their relationship according to the requirements set out in the law. An incorporated “Not-For-Profit” organization has a duty to operate according to rules set out in the Companies Act. This includes keeping records, having annual meetings and so on.
You will be required to file certain documents with Corporations Canada (see Your reporting obligations under the Canada Not-for-profit Corporations Act). By-laws. At the first organizational meeting, the directors can make by-laws.
Many NPO’s want to obtain 501(c) status to avoid paying federal income taxes and other types of state taxes.
## The Process of Incorporation
The process of incorporation is usually different for not-for-profit corporations, although this varies from jurisdiction to jurisdiction. A not-for-profit can be incorporated either federally or provincially. The following is an outline of the process to incorporate federally:
- In order to incorporate a not-for-profit, a NUANS name search report must be done for the proposed name of the corporation.
Once a nonprofit is officially incorporated, it becomes a separate entity from its incorporators.
## Tax-Exempt Status and Benefits
If desired, a not-for-profit organization can also opt to incorporate. Once registered and running, it has to maintain compliance with the appropriate state agency regulating charitable organizations. Thanks to their tax-exempt status, not-for-profit organizations are not subject to most forms of taxation, including sales tax and property taxes.
There are other benefits to incorporating a nonprofit besides liability protection and ease of gaining tax-exempt status. Some of the benefits that an incorporated nonprofit will enjoy include:
- Special rates on postage: Nonprofit organizations can apply for a mail permit for discounted rates.
- Exemption from property tax: A nonprofit corporation is exempt from property taxes.
## Choosing the Right Structure
Incorporating allows your nonprofit to legally be seen as an entity that is separate from you. This separation can protect you from being sued personally.
Should a nonprofit be an LLC or a corporation? It's much better to stick with what works: a C corporation because neither an LLC nor a C corporation would pay taxes as a nonprofit.
The founders of a non-profit organization cannot make a profit or benefit from the net earnings of the organization. However, they can earn money by receiving compensation from the nonprofit.
## Starting a Nonprofit
It is not essential for a non-profit corporation to incorporate. Whether an organization decides to incorporate or not depends upon its activities, nature, or type of organization. As a legal entity, an incorporated association is recognized by the legal system as having rights and responsibilities.
In most states, you may form a nonprofit corporation by filing articles of incorporation with the state business registrar. The board will draft bylaws to establish the internal rules for the nonprofit, such as how new board members may be added. The Internal Revenue Code allows nonprofits to apply for 501(c)(3) status, also known as tax-exempt status.
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