There are many advantages to incorporating as a nonprofit in your state and applying for federal tax-exempt status, but there are also disadvantages.
Very High Failure Rates
The vast majority of all new corporations fail within three years of incorporation. Nonprofit organizations also fail at an alarming rate for a number of reasons, not the least of which is that they are often started by well-meaning people who have limited business experience.
All too often, groups try to rush through the preliminary organizational steps and attempt to file their tax-exemption application as quickly as possible. A tax lawyer can generally file all the necessary paperwork in a few weeks, but it's much better if he takes his time to thoroughly discuss the paperwork with you.
Furthermore, if the groundwork has not been established, the chance that the organization will survive more than a few years is low. In addition, simple oversight and carelessness can result in the failure of an organization.
Among newly formed arts organizations in some states, the failure rate in the first year of operation is 75 percent. This means that funders will need to be certain of the group's long-range planning and overall strategies before considering a partnership.