What is a nonprofit and how is one formed?

A nonprofit organization is generally an organization no part of the income of which is distributable to those managing or controlling the organization (i.e. members, owners, directors, trustees, as applicable).  Instead, the income is retained by the organization to accomplish the purposes of the organization.

How is a nonprofit formed?

First, the type of entity is selected.  A nonprofit organization can take the form of an unincorporated association, a trust, or a corporation. Second, the appropriate documents are drafted to officially form the entity selected.  A trust consists of a document which outlines the provisions that govern the nonprofit organization.  Most state statutes provide for nonprofit corporations, such as the Texas nonprofit corporation.  A Certificate of Formation is filed with the Secretary of State to form a Texas nonprofit corporation.  Other documents are needed to define how the nonprofit corporation is run, who is in charge, and their roles and responsibilities, though they are not filed with the Secretary of State (such as Bylaws and Minutes).

Second, the organization must formally apply with both the IRS (through Form 1023 or 1023-EZ) and the state in which it is seeking an exemption to become tax exempt.

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