Should You Incorporate Your Nonprofit?
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 be legally seen as an entity that is separate from you. This is a good thing because it means that in most instances the nonprofit will be responsible for its own actions.
The formalities involved in officially incorporating your nonprofit may be a bit intimidating, but they exist for a reason. 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 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, as long as your nonprofit is incorporated, 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 bank accounts.
To put it differently, 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 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.
If you’re still on the fence about whether or not you should incorporate your nonprofit, you should read about Ashton’s experience with his nonprofit:
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 the attorney would be better served going directly to the homeless.
Ashton 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 donate 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. 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 the individual.
Sadly, stories like Ashton’s are all too common. That is why we strongly encourage anyone who is starting a nonprofit to incorporate their organization. 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 up the right way is small when compared with what it could save you if you found yourself facing a lawsuit. If you need help incorporating your nonprofit, call Chisholm Law Firm today to schedule your free consultation.