Nonprofit Entity Formation
A nonprofit can be organized as an corporation, unincorporated association or trust. It may also be organized as a limited liability company (LLC) in limited situations. The first step in creating a 501(c)(3) eligible organization such as a charity or religious of worship, or other 501(c) eligible organization, is to decide what form of nonprofit legal entity it should be. Each form has its own strengths and weaknesses. We can discuss these with you to help you decide which is best for your nonprofit, and then work with the relevant governmental authorities to establish the nonprofit legal entity of your choice.
Perhaps one of the most important considerations in nonprofit entity choice is the limitation of liability. Not all entities limit the liability of its directors, officers or members. Unless a nonprofit is organized as a corporation or LLC, the directors, officers and members of the nonprofit may be personally liable for the debts, liabilities and obligations of the nonprofit.
What does it mean to be personally liable? Nonprofits can have legal obligations, such as to pay money because of a contract for goods or services, or because someone was injured and the nonprofit was sued for the injury and lost. When a nonprofit is not a corporation or LLC, in the event the nonprofit does not have the cash or other assets necessary to meet these obligations, the directors, officers and members of the nonprofit may need to meet the obligations out of their own pockets. It is for this reason we always suggest establishing a nonprofit as a non-profit corporation.
A nonprofit entity is usually held to the laws of its state of formation, with respect to its internal affairs. Thus, a Delaware nonprofit nonstock corporation operating in New York will mostly be subject to the Delaware General Corporation Law rather than the New York Not-for-Profit Corporation Law. However, for it to operate in New York, it must also apply to New York’s Department of State for authority to do so. This incurs an additional compliance cost that must be weighed against the benefits of forming an entity in another state. We can advise you as to the pros and cons of doing one over the other so you can make an informed decision as to the specific needs of your organization.
If you need support in forming a not-profit corporation, please reach out to us. We would be glad to assist.