Should You Incorporate Your Nonprofit?

After hearing all of the great ways that you can start small with giving back through your 501c3 nonprofit, you may be thinking “Do I even need a 501c3 nonprofit?” Can’t I just volunteer or donate my resources and services? Isn’t it easier to just avoid all of the headache and legal paperwork?” 

The answer is yes, you can give back without starting a 501c3 nonprofit. However, despite the fact that you can give back without starting a 501c3 nonprofit – in most cases I still encourage you to at least consider doing so. Here is why. 

Let’s begin with some basic definitions. Incorporating a nonprofit is the process of filing the appropriate paperwork with your state to formally create your nonprofit as its own legal entity. Incorporating allows your nonprofit to legally be seen as an entity that is separate from you. This is a good thing because it means in most instances that the nonprofit will be responsible for its own actions. 

I understand that the formalities involved in formally incorporating your nonprofit may be a bit intimidating. Yet, they exist for a reason. 

What is the main purpose of a non-profit organization?

The purpose of formally registering the nonprofit with your state as an official organization is to protect you from being sued personally despite doing good deeds to help others. 

For example, let’s say you and the other board members of your nonprofit decide to recruit volunteers to help you build a house for the homeless. A local store donates the supplies and you divide up the tasks. In the process, one of the volunteers injures themselves on the job site. If the volunteer decides they want to sue and your nonprofit was properly incorporated and following many of the recommendations in this book, the volunteer would most likely only be able to win in a lawsuit against the nonprofit itself. This means that they would only be able to go after the money in the nonprofit’s bank account to satisfy the judgment instead of being able to attach a claim to your personal checking and savings account. 

Another way to say it is if you are running a nonprofit and have not formally set up the nonprofit by incorporating within your state, you are running an “unincorporated association.” Even though you may feel you have saved time and money by not filing any paperwork, the risk that you assume is that you are exposing yourself to liability. This means that if anything adverse happens while you are running the nonprofit, the person or business that was injured could sue you personally. Being sued personally means that your personal bank account, property, and assets are in jeopardy and could be used to satisfy the judgment against you. 

Let me share one more illustration to make this point: 

Example: Ashton cared deeply about helping homeless people and wanted to do something to make a difference. He had heard from a friend that he should speak to a nonprofit attorney to set up his nonprofit the right way, but he figured the money he would spend on that would be better served going directly to the homeless.  

He decided to host a pool party at his apartment complex as a fundraising event. He invited his friends, told them what he wanted to do to help the homeless and asked them to give to his vision. For dessert, Ashton sold homemade cupcakes that he baked himself. He shared with everyone that the proceeds from the cupcakes would go directly toward helping the homeless. Unfortunately, one of his guests started choking on the cupcake due to a severe nut allergy and died before reaching the emergency room. 

Ashton was shocked when he was served legal papers suing him personally for the death of his guest that had choked and died on a cupcake. His lawyer shared that if the civil suit against him won, he could lose his savings and his wages could be garnished to pay the judgment. 

If he had at least incorporated his nonprofit with the State, the nonprofit itself as the host of the event would have been liable instead of Ashton as an individual. 

This is the reason I strongly encourage you to consider incorporating your nonprofit if you plan on doing charitable work as illustrated above. If you have a nonprofit that is incorporated, it can protect you and other individuals involved with the charity from liability as long as you did not act intentionally and were not grossly negligent. The price you pay to set it up the right way is small when compared with what it could save you if you found yourself facing a lawsuit.