The Top 4 Mistakes Made When Incorporating a Nonprofit (and How To Avoid Them)

Although incorporating your nonprofit can seem simple enough, there are some common traps people fall into.Here’s what to look out for:Trick Question #1: Most state nonprofit incorporation applications will ask you to “List the names of the corporation’s initial board of directors”. If you’re like a lot of people starting nonprofits, your initial board is composed of mostly family members and close friends.

• Tip #1: It’s a good idea to include at least a few board members who have a different last name than you to avoid raising red flags with the IRS. Although it probably will not present a problem for getting incorporated, this is very important if you plan to apply for tax-exemption for your nonprofit. If a nonprofit board is composed entirely of family members, it leads the IRS to believe that there is a conflict of interest with how the organization's finances will be used. Note that you can still have family members on your board, but they cannot make up the majority of the board.

Trick Question #2: Applications will ask you to “Provide the name and address of the corporation’s registered agent”.

• Tip #2: Many founders do not know what a Registered Agent is. The Registered Agent is the person responsible for receiving all of the official legal correspondence for an organization. She/he is also the point of contact for official correspondence and lawsuits, therefore must have a physical address in the same state that the organization is incorporated in.

• In practice, your Registered Agent probably won’t be used that much, and is commonly considered the person who serves as the organization's representative. For the purposes of simplicity, we typically recommend listing yourself as the registered agent if you are the incorporator for your organization, and if you are located in the same state that you are incorporating in. Note that your address will be on public record with your state.

• If you do not wish to list yourself as the Registered Agent, many attorneys offer registered agent services for a varying annual fee. If you are friends with an attorney they can serve as your registered agent and many will do this for free or in exchange for a board seat.

Trick Question #3: Another common question on nonprofit incorporation applications is, “Is this corporation being formed with or without a voting membership?”

• Tip #3: A “voting membership” just refers to a nonprofit that uses voting members to elect its board. Most nonprofits (especially smaller ones) do not have voting members, due to the additional paperwork and required formalities. Note: Even without members, other people may still participate as advisers, patrons or contributors, but without a formal vote.

Trick Question #4: This last one is especially tricky, because it’s actually not a question on the incorporation application at all. Although it is not a barrier to obtaining your final documents—called your “Articles of Incorporation”—in order to obtain 501(c)(3) tax-exempt status you will need to include something called the Purpose and Dissolution Clauses in your Articles of Incorporation.

• Tip #4: These are specific clauses that the IRS looks for when granting tax-exemption, and a lot of times people don’t include them in their Articles of Incorporation because they are not required by every state. However, if you plan on applying for tax-exemption for your nonprofit—and you really should—you will need to include these clauses in your Articles of Incorporation.

• Note: if you’ve already incorporated your nonprofit and didn’t include these clauses, you can go back and file for an amendment to your Articles of Incorporation; however, there is a filing fee (which varies by state), and it can take time to process the amendment. For this reason, it’s a good idea to include the Purpose and Dissolution clauses upfront in your incorporation application.

• To read more about what the Purpose and Dissolution clauses are, visit this blog post.

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