In the limited context of this discussion, a business entity is defined as the manner in which a business is recognized by local, state and federal law. When choosing an entity for your business, it is important to consider, among other things: ease of entry and maintenance, its flexibility with the acquisition and disbursement of revenue and acquired funds, its exposure to liability, and government scrutiny. There are many business entities, including for profits such as: sole proprietorship, partnership, and many types of corporations; and non-profit the most well known of which is a 501(c)(3).

This array of choices is made more complex by the industry in which the business may work. For example, the business of providing low cost house is often structured as a public benefit non-profit corporation, but such businesses also have to assume the burden of state and federal real estate laws.

Also with in the non-profit community there are several business entities. Religious, trade groups and other mutual benefit businesses can be non-profit but are organized under a federal tax code other than 501(c)(3). This discussion will focus on the California businesses that would qualify under section 501(c)(3) of the Internal Revenue Code.

Given this limitation, it is important to understand that this is a reconnaissance level discussion of the issue and is not intended to be comprehensive. It is meant to be one place to start.

Yes, a non-profit can help avoid taxes but not all of them. You can avoid paying income tax on the income of the corporation, but withholding and other employment taxes are still required for employees. Also, sales tax on the retail sale of items such as corporation merchandise, like key chains and tee shirts, must be paid. One of the biggest savings is not paying property tax or taxes on personal property owned by the corporation.

Reduced personal liability and unpaid debt exposure. In most cases directors, employees and other agents of the corporation are protected from liability for actions on behalf of or by the corporation. But still it is important to buy insurance for your board. There are limits to this safety net.

Donations of money and gifts to a 501(c)(3) are deductible by the donor. It is always important to provide a letter of thanks with the corporation’s EIN to the donor.

Eligibility for grants from government and various foundations. Many government agencies and various foundations will only provide grants to non-profits.

Perpetual legal existence. If the mission of the corporation is enduring and readily supported, this is essential.

Representatives of a non-profit can solicit without permits. Telephone and door-to-door solicitations are legally allowed.

Miscellaneous benefits. Such benefits can include: lower third class postal rates, lower publication and advertising rates, lower facility rental rates, free public service announcements, and there are others.

Paperwork and bother. To form a non-profit, incorporation application documents must be sent to California Department of Corporations. Minutes of the first board meeting and newly drafted By-Laws must be included. After formation, annual registration must be sent to the state and feds. There are fees attached to these processes. There are also mandatory activities for the corporation including: meetings, minutes, keeping proper accounts and adoption of policies.

Significant limitations on payments to directors and officers, and anti-self dealing laws. Directors and officers cannot receive compensation, other than direct reimbursements, from a non-profit corporations. For example, if a director or a family member of a director provides computer services for the corporation, the work has to be done for free. This is very much different from a sole proprietorship.

Restrictions on political activities. The corporation’s ability to participate in political campaigns, and to engage in legislative or grassroots political activities is restricted by federal tax codes.

Active oversight by California's Attorney General’s Office. The state can take a non-profit corporation to court to assure that laws are properly followed.

What is the best way to begin a new non-profit business? Probably the best way to initiate new business activities that qualify for a public benefit non-profit is to find an existing non- profit and include the new activities into that non-profit. This will allow these new programs to become known, grow and initiate and improve management systems, at a low cost. If necessary, a new non-profit entity can be created to continue the programs.

What does it cost to form a new public benefit non-profit? As of 2012, costs can vary from about $500 to a few thousand, perhaps as much as $4,000 or so, depending on whether an attorney or other consultants are used. If the application is completed and submitted with hired consultants the cost is about $500 for a corporation expecting to earn less than $10,000 in gross revenues, and about $950 for a corporation expected to earn a greater amount. Those interested going it alone should purchase the book "How to Form a Nonprofit Corporation in California" by Anthony Mancuso, published by Nolo Press.

Minimally, what are the approximate annual costs to meet required statutory reporting? For very small non-profits to file and cover state and federal registration fees, the costs are a few hundred dollars. Often an accountant is used to file these annual reports, and that can boosts costs by about $500 to $750. Also, it is likely that an accounting system will need to be purchased. If a bookkeeper is hired to keep accounts, costs can further increase by about $1,500 or more per year. Costs can easily increase beyond these minimal amounts depending upon the size and complexity of the corporation.

Are there any complexities in choosing a name for a new non-profit? There can be. One of the first things to do in forming a non-profit is to choose a name. It must be unique and approved by the department of state. Put thought into selecting a corporation name. In representing the goodwill of the corporation, it will become one of the non-profit’s most valuable assets.

Is it possible to dissolve a non-profit corporation? Yes. A dissolution can be voluntary or involuntary. If involuntary, the courts preside over the process and disposition of the assets. A voluntary dissolution is accomplished by filing the proper forms with the appropriate state and federal agencies, and transferring ownership of assets to another non-profit.

What role do grants play in the formation of non-profit corporations? Grants can play a significant role in the life of a non-profit. There are times when local governments are mandated to provide certain services by the state or federal government. Grant funding often (but not always) accompanies these mandates and the local government negotiates contracts with non-profits to provide the services. Seldom are new non-profits formed, but a new arm of an existing non-profit can be developed to recruit the new personnel and other resources to provide the new services. Existing non-profits can also compete directly for government grants and grants from foundations. It is important to remember, however, that grant funding for a given program can be fickle. It can decline or vanish with a declining economy or changing politics.

Purchase the NOLO Press book How to Form a Nonprofit Corporation in California, by Anthony Mancuso.

State of California Department of Justice, charities: oag.ca.gov/charities

California Franchise Tax Board, nonprofits: ftb.ca.gov/businesses/Exempt_organizations

IRS Charities and Nonprofits: irs.gov/Charities-&-Non-Profits