Incorporating a business can be a complicated process, especially as a non-profit organization. We’ve put together this handy guide to walk you through the basics of starting your own non-profit corporation.
What is a non-profit corporation?
A non-profit corporation is an incorporated business that meets the definition of a non-profit organization (NPO) as defined in the Income Tax Act. In short, an NPO is a business that operates for any purpose other than profit, such as for the purpose of social welfare, civic improvement, pleasure, or recreation.
Is a non-profit right for your needs?
If you’re considering whether a non-profit is the right fit for you, it’s safe to assume that you’re interested in starting a business that gives back to the community in some capacity. If that’s the case, you’ll probably want to consider whether a non profit organization or a charitable organization makes the most sense for your business idea.
Both non-profit organizations and charitable organizations operate on a not-for-profit basis, but beyond that, non-profits and charities are two distinct business classifications. In fact, a non-profit organization cannot be a charity and vice versa.
Non-profits and charities are distinguished from one another by their main purpose as a business. A charitable organization must operate exclusively for charitable purposes that fall into the following categories: the relief of poverty, the advancement of education, the advancement of religion, and other purposes benefiting the community.
On the other hand, a non-profit organization can operate for any purpose other than making a profit. If an NPO makes a profit, it must be used to further the goals of the corporation rather than to benefit the members of the corporation.
Another difference between the two business structures is that when a charity registers with Canada Revenue Agency (CRA) and is approved for charitable status, they can begin providing charitable tax receipts to donors. An NPO cannot issue charitable tax receipts.
An organization can only fit the definition of either a charity or a non-profit, never both. If your business is eligible to register as a charity, then it does not qualify as an NPO. So when you’re deciding whether to start a non-profit, consider first whether it will operate exclusively for charitable purposes (making it a charity), or whether it will operate for any purpose other than profit (making it a non-profit).
Step 1: Research similar non-profits
When you start any kind of business, whether it’s for profit or non-profit, it’s important to research the competition that already exists in the marketplace you’re hoping to enter. While you won’t be competing for income like for profit companies do, you’ll want to make sure that there is a significant enough portion of the community that is not currently being serviced, or you risk unnecessary overlap between your non-profit and existing non-profits in the same space.
Conduct a needs analysis
As an aspiring non-profit corporation, it’s important to consider the community and what they need. It’s noble to put social causes ahead of profits, but you should ensure your idea is relevant to the community you wish to serve. A needs analysis doesn’t have to be sophisticated. The key is to talk to the people you plan to help and listen to what they tell you. This can help ensure you’re clear on how your non-profit corporation can have the most positive impact.
Know the competition
Once you’ve identified the needs of the community, research what other non-profits already serve this community. Do they provide services to meet the needs you’ve identified, or is there a gap in the market that you can fill? Perhaps other non-profits are doing work to meet those needs, but they don’t have sufficient resources to do it well, or they are operating in a neighbouring community that doesn’t include yours. In these cases, there may be room for your non-profit to pick up the slack and help improve the community.
Step 2: Build a structure for your non-profit
Now that you’ve decided to start a non-profit, it’s time to turn your attention to creating the structure of your corporation.
Create a mission statement
A carefully considered mission statement is a must for every type of business. In this document, you’ll briefly describe your vision for your non-profit corporation for yourself, potential investors, as well as the general public. Before you can craft a statement, write out your corporation’s purpose, who it will serve, what makes your non-profit unique, and how you plan to accomplish your goals. Then distill that information into a relatively short and concise mission statement that succinctly communicates your central goal and core values as a non-profit corporation.
Write a business plan
While your mission statement is all about communicating the goals of your non-profit corporation in an easily digestible format, a business plan is where you can really get into detail about the ins and outs of your new business. In other words, your business plan expands on how you’ll put your goals into action, including details like what resources you’ll need, anticipated expenses, ideas for funding sources, board members, day-to-day operations, and your short- and long term-plans for the corporation.
Not only does a detailed business plan help you to set, measure, and adjust your goals, it’s also essential to secure funding and partnership opportunities. A business plan will use research, data, and planning to illustrate the viability of your non-profit idea. If you’re hoping to secure funding, it can convince people and other businesses to invest in your corporation. It can also cover the practical details of how you intend to use the funding to meet your goals, to help convince investors their contributions will go to good use.
Create a non-profit board
Your next step is to decide who will be a director on the board of your non-profit corporation. The minimum number of board members required for your non-profit is generally determined by the province or territory in which you intend to operate.
For example, in Ontario, not-for-profit corporations are required to have at least three directors on its board. On the other hand, Alberta requires at least two board members to form a private non-profit organization, and a minimum of three people to form a public company. Meanwhile, in British Columbia, an ordinary society (which includes non-profit organizations) is required to have a minimum of three directors on the board.
Step 3: Incorporate your non-profit
Once you’re convinced of the viability of your idea and drafted your business plan and mission statement, it’s time to bring your non-profit business to life and begin the incorporation process.
Benefits of incorporating
While incorporating your non-profit organization is not mandatory, there are a number of benefits to incorporating.
Non-profit organizations in Canada are automatically exempt from paying taxes, provided they meet the requirements to qualify as an NPO as described in the Income Tax Act.
A non-profit that is incorporated becomes a legal entity which is separate from its members and directors. This reduces the liability of the individuals involved.
An incorporated non-profit can enter contracts, borrow money, and hold property in the corporation’s name.
While you may initially operate as member-funded societies, you may want additional, and non-profits with a certificate of incorporation may have greater access to government grants and other funding opportunities than unincorporated non-profits.
An incorporated non-profit can continue regardless of changes in membership or ownership.
Incorporating your non-profit is also helpful when it comes to establishing and governing the operations and procedures of the corporation, also known as bylaws. While unincorporated organizations can develop rules that govern the association, these bylaws will not be legally binding.
Federal or provincial corporation?
If you’ve decided to incorporate, you must decide on whether to become a federal corporation or a provincial/territorial corporation (depending on the location(s) you intend to conduct business in). If you incorporate federally, you may also have to register your non-profit extra-provincially in each individual province or territory in which you do business.
In order to incorporate, you need to file your Articles of Incorporation, which include important business information such as your registered office address, mailing address, and board members. You’ll also need to create the company’s formation documents and Minute Book. These will, among other things, state any decisions made by your company’s shareholders to appoint directors, and to create corporate bylaws.
Step 4: Prepare for ongoing compliance
A necessary part of incorporating is fulfilling certain obligations to stay in good legal standing. Failure to do so can jeopardize your active status. Should this occur, you’d need to file a reinstatement application.
File annual reports
Non-profit corporations are required to file an annual return with Corporations Canada. If your non-profit is federally incorporated, you can file your annual report forms online.
File tax returns
In addition to the annual return you’re required to file, some non-profits will be required to submit a yearly tax return to Canada Revenue Agency (CRA), even though you are technically tax exempt.
While an unincorporated non-profit organization doesn’t have to register as a a sole proprietorship or corporation to receive its tax-exempt status, you may need to file an NPO information return, an annual return including information on the details of the non-profit such as amounts received, statement of assets and liabilities, and more.
If your non-profit corporation meets the requirements to file an NPO information return, you may also be required to file other returns as well.
Even if your business qualifies for the tax-exempt status of non-profit organizations, you may still be required to pay taxes on property income or capital gains, as well as GST/HST on purchases.
Keep your corporate records up to date
Like traditional, for-profit corporations, non-profits also have the obligation to maintain up to date company details and director information on the corporate registry. For example, if a new director is appointed, this change will need to be recorded in the corporate registry. You can file this with your local government registry.
Starting a non-profit corporation FAQs
Still have questions about how to incorporate your non-profit business? Here we’ve provided answers to common questions that were not covered in the material above.
Can you make money by owning a non-profit organization?
By definition, a non-profit organization operates for any reason other than to earn a profit. Any profit that is earned cannot personally benefit any individual member of the organization. Income earned from its activities will be put right back into the corporation to further the goals and mission of the organization. However, the directors of a non-profit corporation can fix reasonable levels of remuneration for the directors, officers, and employees, which would be included in their operating costs.
What is the difference between a 501(c)(3) and a non-profit corporation?
A 501(c)(3) is the designation for most non-profits in the United States. If the non-profit is designated as a 501(c)(3), it is eligible for tax exemption.
In Canada, non-profits that fit the definition of a non-profit organization as defined in the Income Tax Act are automatically exempt from paying taxes, so there is no need to apply to receive tax-exempt status.
Can I run an incorporated non-profit by myself?
While it is possible to run a single person corporation with only one board member, each province and territory has different rules regarding the minimum number of directors required to run a non-profit corporation.