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United States/NY state here, if it makes a difference.

My understanding is that there is a difference between a nonprofit corporation and its tax status. As I understand it, I can form a charitable nonprofit, but it will take several years (I believe 3) before I can apply to have that nonprofit recognized as a 501(c)(3) ("tax exempt") charitable nonprofit.

My understanding is, in the meantime (for the first few years), I can only operate the nonprofit as charitable and tax-paying, meaning we pay federal and state taxes.

My question: is my understanding correct, or are all non-profits tax exempt? If so, then what classification (other than c3) would my nonprofit have for the first few years?

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No. You have 27 months to apply.

You’ll see why when you see the Form 1023. It’s huge, and it is easier to answer the questions if you have been operating for awhile.

However, it is a nonprofit from day one. The whole time it must look, walk and quack like a nonprofit. It cannot use the *prior to filing” period to play for-profit reindeer games. If it does, it must admit those on the Form 1023, and this may result in the application being denied if the activities are not reasonable UBI for a boba-dude nonprofit.

File Form 990 from day one

Your nonprofit files its taxes on Form 990. You will need to pay UBI tax on UBI.

You will file as the nonprofit type you reasonably expect it to be.

Your donors can expect their Pre-filing donations to be tax deductible, though it might be prudent if them to not actually take the deduction until status is granted, since you seem diffident about whether that will happen. It creates a huge mess when a proto-nonprofit bodges the paperwork.

Within 39 months you should know, so they will have time to file 1040X to claim their deduction.

Likewise, if your effort to attain nonprofit status washes out, you retroactively file normal C-Corporation taxes with Fed and state.

Don’t wash out. If you are not serious, save yourself the $850 filing fee and do an L3C or something.

That said, a nonprofit can own a for-profit Corp. Sky’s the limit.

You just have to wrap it in its own corporate structure. If it’s a trivial thing that would be OK under UBI rules, a pass-through SMLLC is fine.

Otherwise, kit it out as a full C-Corporation (or Corp-taxed LLC). At this point, ProfitCorp pays its own taxes, and the nonprofit collects passive dividends. Dividends aren’t even UBI and there’s no limit to how much income a nonprofit gets from them.

In fact, state law (UPMIFA) makes dividend income mandatory* for nonprofits with endowments.

Literally, a nonprofit formed for historic preservation of old games could accidentally ride the wave of retro gaming, find themselves making money hand over fist, and the UBI would threaten their nonprofit status. The only responsible thing, then, would be to spin off the winners to a for-profit Corp, have that for-profit play all the reindeer games to become a major player, acquire Activision Blizzard and Valve, and be a Fortune 500 company. All passing down dividends to a very happy nonprofit.


* well, effectively. UMIFA obliged endowments to hoard stocks that paid dividends at the expense of not being able to buy better stocks that pay via capital gains. UPMIFA stopped that bias. You could populate an endowment with absolutely no dividend payers if you really wanted to, but it would miss the point of UPMIFA.

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