The Nonprofit Option Looking to start a nonprofit business? This guide will get you started.

Of all the decisions you make when starting a business, probably the most important one relating to taxes is the type of legal structure you select for your company.

The most common forms of business are sole proprietorship, partnership, corporation and S corporation, but there's another option: organizing your venture as a nonprofit corporation.

Unlike a for-profit business, a nonprofit may be eligible for certain benefits, such as sales, property and income tax exemptions at the state level. The IRS points out that while most federal tax-exempt organizations are nonprofit organizations, organizing as a nonprofit at the state level does not automatically grant you an exemption from federal income tax.

Another major difference between a profit and nonprofit business deals with the treatment of the profits. With a for-profit business, the owners and shareholders generally receive the profits. With a nonprofit, any money that is left after the organization has paid its bills is put back into the organization. Some types of nonprofits can receive contributions that are tax deductible to the individual who contributes to the organization. Keep in mind that nonprofits are organized to provide some benefit to the public.

Nonprofits are incorporated under the laws of the state in which they are established. To receive federal tax-exempt status, the organization must apply with the IRS. First, you must have an Employer Identification Number (EIN) and then apply for recognition of exemption by filing Form 1023 (Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code) or Form 1024 (Application for Recognition of Exemption under Section 501(a) ) with the necessary filing fee. Both forms are available online at irs.gov.

The IRS identifies the different types of nonprofit organizations by the tax code by which they qualify for exempt status. One of the most common forms is 501(c)(3), which is set up to do charitable, educational, scientific, religious and literary work. This includes a wide range of organizations, from continuing education centers to outpatient clinics and hospitals.

The IRS also mandates that there are certain activities tax-exempt organizations can't engage in if they want to keep their exempt status. For example, a section 50l(c)(3) organization cannot intervene in political campaigns.

Remember, nonprofits still have to pay employment taxes, but in some states they may be exempt from paying sales tax. Check with your state to make sure you understand how nonprofit status is treated in your area. In addition, nonprofits may be hit with unrelated business income tax. This is regular income from a trade or business that is not substantially related to the charitable purpose. Any exempt organization under Section 501(a) or Section 529(a) must file Form 990-T (Exempt Organization Business Income Tax Return) if the organization has gross income of $1,000 or more from an unrelated business and pay tax on the income.

If your nonprofit has revenues of more than $25,000 a year, be sure to file an annual report (Form 990) with the IRS. Form 990-EZ is a shortened version of 990 and is designed for use by small exempt organizations with incomes of less than $1 million.

Form 990 asks you to provide information on the organization's income, expenses and staff salaries. You also may have to comply with a similar state requirement. The IRS report must be made available for public review. If you use the calendar year as your accounting period, file Form 990 by May 15.

For more information on IRS tax-exempt status, download IRS Publication 557 (Tax-Exempt Status for Your Organization) at irs.gov.

This article is an edited excerpt from "Start Your Own Business, Fifth Edition", published by Entrepreneur Press.