Back around Halloween, I released a short animated video about the reasons to incorporate a nonprofit organization. Since it was a spooky time of the year, the metaphor I used was Frankenstein, an artificial person. A friend of mine watched the clip and came to the conclusion that I was anti-incorporation. Not true!
Basically, creating a corporation means the organization establishes a “fictional person” which is an actual legal term. This person can take the blame for anything you do (or anything anyone else in the organization does) in the name of the group. This limits any liability you might incur when acting as a group.
There’s also a practical side. Establishing this fictional entity is also what allows the state and the banks to recognize that your effort has a presence beyond what you might have individually. With it, you can open a bank account in the organization’s name rather than your own. It allows you to establish a clean separation of your personal life and finances from the professional life and finances of the group. It’s clearer what belongs to the organization and what belongs to you.
These are the main reasons most people incorporate as a matter of course when starting a new nonprofit. But there’s more to it than that.
Besides helping to protect you and your collaborators from mistakes you all might make, the “existence” of this pretend person encourages people to think of the organization’s goals and aspirations from an independent point of view. How many times have you seen people in an organization bicker about a decision where most of the argument is about what is best for an individual rather than the group?
Establishing another formal entity allows us to assign the mission, the principles, and the general welfare of the organization to someone besides yourself or any individual. Since the fake person is motivated purely by the organization’s values and needs when your group settles on a strategic plan or makes an important decision, that plan or decision belongs to this entity, not to you or anyone else in the group. That is, by creating a phony person, you can enable yourself to let go of your own ego. It’s a psychological trick.
Also, when you decide to move on, the organization will hopefully outlast you. The more that is owned by this nonexistent being, the fewer problems you will have in handing off responsibility when that time comes.
For all these reasons, foundations and other partners you may need to work with tend to respect organizations that have incorporated over those that have not.
While incorporating is often a great idea, not all organizations should take this step. If your group is still testing the waters and unsure if it will be able to attain sustainability, it might be better to consider an alternative such as finding a fiscal sponsor. But even in that case, having a fake person who holds the organization’s interests above all else can be an important tool in making your group successful.