What Is Legal Structure?
Before you file any government documents, it is critical that you have a clear end goal in mind of how you want your organization classified in both state and federal records. Why are you forming a nonprofit? What do you want to accomplish? The answer to such questions ultimately inform the legal structure that you will choose for your organization, the 501(c) classification you apply for, and the details contained in these documents.
For example, if you form a nonprofit corporation, in the articles of incorporation you will provide a “statement of corporate purpose”. This description will need to complement the narrative in your IRS 501(c) application of the activities your nonprofit conducts as part of its mission.
Legal structures are formed under state law, which means you’ll encounter slightly different options in every state. There are also several different choices when it comes to federal tax exemption. Traditionally, when starting a nonprofit, the best choice for legal structure is to form a nonprofit corporation at the state level and to apply for 501(c)(3) tax exemption at the federal level. This is the legal structure commonly known and referred to as “charitable organization.” The IRS requires the inclusion of specific language in your formation documents that is not always part of state templates, so you need to be clear about your direction before you start.
It is not unusual for social entrepreneurs to struggle with deciding whether their organization is a nonprofit or a for-profit. Take the time to understand your options. Do this before you start filing state or federal government documents and know the requirements and qualifications as you begin the process.
Key Takeaways:
- Legal structures are formed under state law and can vary from state to state.
- You need to know your final federal classification for your nonprofit before you file government documents.
- The IRS requires specific language in formation documents that may not be included on state templates.
