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Advantages of a 501c3

A nonprofit organization exists as a legal entity in its own right and separately from its founder(s). Incorporation puts the nonprofit’s mission and structure above the personal interests of individuals associated with it.

Organizations that qualify as public charities under Internal Revenue Code 501(c)(3) are eligible for federal exemption from payment of corporate income tax. Once exempt from this tax, the nonprofit will usually be exempt from similar state and local taxes. If an organization has obtained 501(c)(3) tax exempt status, an individual’s or company’s charitable contributions to this entity are tax-deductible.

Under the law, creditors and courts are limited to the assets of the nonprofit organization. The founders, directors, members, and employees are not personally liable for the nonprofit’s debts. There are exceptions. A person cannot use the corporation to shield illegal or irresponsible acts on his/her part. Also, directors have a fiduciary responsibility; if they do not perform their jobs in the nonprofit’s best interests, and the nonprofit is harmed, they can be held liable.

Employees of a 501c3 organization are eligible for the 403b savings plan (and may also contribute to a 401K with additional for-profit earnings). 403b retirement plans are identical in most ways to 401k plans. There are two distinct advantages for non-profit institutions. 403b programs have very easy review and certification process since they are exempt from the Employee Retirement Income Security Act.

For the employee, there are two big advantages. Number one, the institution’s contribution to the 403b retirement account can be taken out without penalty if it invested in an annuity. Since the non-profit organization that matched it does not owe taxes (since they are a non-profit), the US government says these contributions are exempt from tax liability. The 2nd advantage is being to leave the account with a former 403b retirement plan. Since there are no administrative costs for the 403b retirement account, institutions will almost always let them leave the account in place after they leave.

A non-profit can own property, stock, bonds, royalties, and most other investment opportunities.

“UBI”, or “unrelated business income”, is income that an exempt organization receives from conducting activities that are not related to its exempt purpose. Even if an organization uses the income from an unrelated activity to help pay for its exempt activities, that income is still UBI. An activity is an unrelated business if it meets three requirements:
It is a trade or business,
It is regularly carried on, and
It is not substantially related to the furtherance of the exempt purpose of the organization.


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