Nonprofit businesses are intended to provide important charitable services to communities, rather than trying to rake in the dough for shareholders. That's why it's a little unexpected that it is more complicated to form a nonprofit than a for-profit business.
Additional documentation is required for a nonprofit on both the state and federal levels in most states, including in Tennessee.
Is it worth the trouble? It may be. Nonprofit corporate status confers a trio of important advantages: tax breaks for the corporation, tax breaks for donors, and the legal right to solicit donations.
What Is a Nonprofit?
The legal skeleton of a nonprofit corporation closely resembles that of a for-profit corporation. The structure of each includes a board of directors, a CEO running the show, bylaws they operate under, annual board meetings to enforce the bylaws, and other similar features.
The primary difference between a nonprofit and a for-profit corporation is the purpose of the primary business, as spelled out in their names. A for-profit business corporation organizes in order to make financial profit and improve the financial position of their shareholders.
The purpose of a nonprofit is to assist a worthy cause or to attain a charitable goal.
While for-profit businesses attract investors by offering stock with dividends and financial gain potential, nonprofit corporations must find donors who are not seeking to invest for income. Companies like Amazon, Exxon and Apple are all for-profits, in the business of making profits.
Well-known nonprofits include the YMCA, Doctors Without Borders and Alcoholics Anonymous.
Nonprofits are required to use all of their income to either pay the corporate expenses or to invest in their cause.
Nonprofits Generate Income
Just because a nonprofit is not operating with the primary goal of making profits doesn't mean it can't generate income. Many get donations from contributors or provide remunerated services. But nonprofits are required to use all of their income to either pay the corporate expenses or to invest in their cause.
Nonprofit corporations operate for charitable or community causes that are intended to benefit the public. For example, a nonprofit like the YMCA charges members dues and receives community donations, which constitute income. But all of these funds are used to pay employees, rent space and provide programs for the community.
That is why nonprofits are granted tax-exempt status. Unlike for-profit companies, nonprofits do not have to pay income taxes at the federal and state levels. But those forming nonprofits in Tennessee have to jump through more than a few hoops to achieve that end.
Tennessee Nonprofit Corporation Act
In Tennessee, nonprofit corporations are governed by the Tennessee Nonprofit Corporation Act, found at Chapter 51 of the Tennessee Code. The act sets out the steps for organizing as a nonprofit corporation in the state.
The paperwork can be completed online, but it is also possible to download the forms, then complete and file the paperwork.
Essential steps to forming a nonprofit corporation in Tennessee state include:
- Select a unique corporate name.
- Appoint directors for the corporation.
- Name an agent for service of process.
- Complete and file a Nonprofit Corporation Charter.
- Create corporate bylaws.
- Complete and file IRS Form 1023.
- Complete and file with the Tennessee Department of Revenue an application for exemption from sales and use taxes.
- Complete an Application for Registration of a Charitable Organization.
- Submit the application along with a copy of the corporation's charter, a copy of its bylaws and a copy of its most recently filed federal tax return, if any, to Tennessee Department of State.
Naming the Nonprofit Corporation
The first step in creating a nonprofit with tax-exempt status is to select a name for the company. Like for-profit companies, nonprofit corporations that operate in Tennessee must select a unique name, one not in use by any other business organization operating in Tennessee.
The name must include a term specifying the company's limited liability status, which can include “corporation,” “incorporated” or an abbreviation of one of these words.
The state makes it easier to determine whether a business name is in use by offering a free business name availability search on the website of the Tennessee Secretary of State. This website also contains a name reservation form that can be used to reserve a corporate name while pending completion of additional requisite paperwork.
The state makes it easier to determine whether a business name is in use by offering a free business name availability search on the website of the Tennessee Secretary of State.
Appointing a Board of Directors
Under the Tennessee Code, a nonprofit corporation must select both board members and board officers.
The board members—there must be at least three natural persons—are usually charged with developing the mission of the nonprofit; the officers (including a president and a secretary) manage the nonprofit on a daily basis and report back to the board. The president is also called the chief executive officer, or CEO.
All board members and officers have a fiduciary obligation to act in good faith and in the best interests of the nonprofit organization, while officers must also exercise care in managing its affairs. Both the board members and the officers can be held personally liable for harm to the nonprofit caused by breaching their fiduciary duties of good faith, loyalty and care.
Appointing a Registered Agent
The registered agent of the nonprofit corporation need not be a board member or an officer. Their duty is to receive official correspondence on behalf of the corporation. The primary requirement is that the registered agent must have a street address in Tennessee.
Completing Nonprofit Corporation Charter
The Nonprofit Corporation Charter is the Tennessee equivalent of Articles of Incorporation in other states. To create a nonprofit, it is necessary to complete a Nonprofit Corporation Charter form, which can be downloaded from the website of the Tennessee Department of State.
The completed form can be mailed or delivered in person to the Corporate Filings Division of the Tennessee Department of State. There is a filing fee of $1,000.
The charter will include the name of the corporation, as well as certain other information, including:
- Name and address of the nonprofit's registered agent.
- Calendar for the nonprofit's fiscal year, which usually ends in December.
- Projected duration of the nonprofit.
- Effective date for the filing.
- Nonprofit's primary executive office.
- Names and addresses of all incorporators.
- Signatures of all incorporators.
The charter also must state how and to whom the corporation's assets are to be distributed in the event that it is dissolved, and mailed to: Tennessee Department of State, Corporate Filings, 312 Rosa L. Parks Avenue, 6th Floor, William R. Snodgrass Tower, Nashville, TN 37243.
Other Steps for Nonprofit Formation
Corporate bylaws set out the rules and regulations that include how and when meetings are to be held, the appointment and responsibilities of officers and directors, and the formation of committees.
Internal Revenue Service Form 1023, available from the IRS website, is required for recognition as a nonprofit under Section 501(c) of the Internal Revenue Code. This IRS form asks for information about the corporation's organizational structure, purposes, activities and finances.
When approved by the IRS, the nonprofit is exempt from most federal income taxes, and donors can deduct the value of their donations on their tax returns.
The application for exemption from sales and use taxes is a Tennessee Department of Revenue document, available from the DOR's website. It seeks much of the same information required in the corporate charter.
Application for Registration of a Charitable Organization
The application for registration of a charitable organization is likewise a state document available for download from the website of the Tennessee Department of State. This form seeks basic information about the corporation and its tax-exempt status that must be signed by two corporate officers.
It is not authorized to solicit donations in the state until the Tennessee Department of State approves the corporation's application for registration.
- State of Tennessee Department of State: Charter (Nonprofit Corporation)
- Internal Revenue Service: Form 1023
- Tennessee Department of State: Application for Registration of a Charitable Organization
- Tennessee Department of Revenue: Application for Registration Sales and Use Tax Exempt Entities
- Tennessee Secretary of State: Business Name Availability
- IRS Form 990: Return of Organization Exempt From Income Tax
Teo Spengler earned a JD from U.C. Berkeley Law School. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an MA and an MFA in English/writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.