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so you're planning on starting a new non-profit sometime soon well maybe you've heard something about incorporating but you don't know fully what that means or someone may have told you that you need to form an llc instead there's a lot of misinformation and misunderstanding about this topic so let's unpack the idea of nonprofit incorporation [Music] hi i'm greg mcrae founder and ceo of foundation group and welcome once again to our 501c3 university channel i've talked extensively about starting a nonprofit in a recent video that we did we're going to link that below so be sure and check that out the summary idea is that there are two primary legal steps to starting a non-profit forming the legal entity and securing 501c3 status forming the legal entity is where incorporation comes into play now incorporating is the act of creating a legal business entity in a u.s state or territory now there's other forms of business entities as well including llc's and partnerships and others we're going to touch briefly on those later and explain why those choices are not usually the best choice for new non-profits each state has its own corporate law or code now there's far more similarities than differences but no state law is exactly the same as another what is the same however is that in the eyes of the law creating a corporation is the equivalent of creating a legal person sounds like strange terminology doesn't it to create a legal person simply means that the entity that has been created has its own standing under the law now this means that corporations can buy and sell they can borrow and lend under their own name it also means they can sue and be sued it exists wholly apart from the people who started now this is very different than the sole proprietorship for example where the business and the person really are not legally distinguishable at all incorporating a non-profit happens by filing articles of incorporation in a particular state and you'll see some states refer to this document as a charter our home state of tennessee is one of those most often a non-profit should incorporate in the state in which it will base its operations and know it is not better to incorporate in delaware we're going to hit that topic in another video coming up soon while most states have boilerplate templates available to fill out for articles of incorporation we really don't recommend using those at least not in most states the irs has some pretty strict rules governing what must be contained in the articles in order for that nonprofit to qualify for 501c3 status and only one state includes that in their template so if you don't know what's supposed to go in there and you incorporate using a state template the irs will make you amend your articles and that's just a pain this is yet another reason why non-profit formation does not make for a good diy project i mentioned that by incorporating you're creating a legally distinguishable entity that's separate from its founders directors and officers why does that matter personal liability is a huge reason why it matters as legal persons corporations are responsible for their own actions same as humans this distinction or separation matters otherwise leaders can be held personally liable for the action of the organization this is true of for-profit and non-profit corporations this concept of the corporate veil shields individuals for most of the personal liability that could potentially fall on them now it is possible to pierce the corporate veil in matters of gross negligence or criminal behavior but this is still an indispensable benefit but incorporation is a choice the irs allows other entity types to apply for 501c3 status and one of those is the unincorporated association these are prepared by filing what is called articles of association that it's adopted by the initial board of directors most states don't require unincorporated associations and even file this document with their business or corporations division we never never recommend unincorporated associations for non-profits because of the risk of personal liability they are not separate legal persons and they don't provide any distinction between the entity and its leaders another popular entity type is the llc now this is a question that comes up a lot for us in fact we often have potential clients reach out to us for help in seeking 501c3 status after they've already formed an llc this almost never works it is true that the irs will allow a non-profit llc to apply for 501c3 status but it's not what you think first of all only a handful of states actually even recognize a non-profit llc secondly and this is the important part to qualify for 501c3 status the llc's members or shareholders must be made up entirely of existing 501c3 organizations so that means essentially an llc seeking 501c3 status must be a joint venture of already existing 501c3 nonprofits a nonprofit trust can also seek 501c3 status as can what are called community chests now both are legitimate choices but always have a very distinct reason why they're the right choice it's safe to say that if you're looking to start a non-profit and you don't know if one of those two entities may be the right choice for you they're probably not there's a reason over 95 percent of 501 c 3 organizations are corporations there's more that needs to be said on this and those thoughts are coming in follow-up videos we need to talk about registered agents what is that and do you need one we also need to discuss corporate reports that's coming up soon in a video as well all important topics related to non-profit incorporation well that's it for now be sure and like this video subscribe if you haven't already be sure to click the bell icon to be notified of new videos when we post them thanks for watching and we'll see you next time [Music]