What is a Nonprofit Corporation?
Nonprofit corporations are organizations formed to further a social clause, provide public benefit, and
serve a charitable purpose. These groups can be for religious, educational, or other public service
reasons that aren't aimed to garner profit, unlike many businesses strive to achieve.
Also known as 501(c)(3), derived from the tax code section that permits operation, the Internal Revenue Service recognizes a nonprofit corporation as a tax-exempt organization created solely for public or charitable purposes.
Understanding a Nonprofit Corporation
This type of organization must have at least one director or trustee. It can either distribute its
assets to the federal government or state or give them to another nonprofit corporation upon
While most corporations for profit can engage in any lawful business activity, nonprofit businesses must indicate a purpose that benefits the general public, a specific segment of the community, or a membership-based group.
Moreover, donations from individuals and other business entities are typically exempt from federal or state taxation.
Nonprofit Corporations vs. Other Business Structures
If you’re uncertain about starting a nonprofit corporation or other business entities, here are the differences you should consider.
Shareholders who contribute money, services, or properties can also own other business structures. They expect to profit from their investments through dividends of appreciation of shared values. Meanwhile, a nonprofit business doesn’t have owners. Voluntary members don’t expect any profit from their efforts.
Distribution of corporate profits
Any profits earned by nonprofit organizations are used to further their charitable cause, while benefit corporations can distribute their profits to shareholders.
The duties of a benefit corporation’s directors are wide-scoped, as they can affect shareholders, employees, and the community. On the other hand, the responsibilities of a nonprofit business director are limited to only fulfilling its purpose.
Benefit companies earn capital and funding by selling products, offering services, and looking for investments. A 501(c)(3) can’t do this and can only get funding through donations, government and private grants, and fundraising activities.
Most business structures are taxed as a C corporation and subjected to federal income tax at a corporate
level. If they're under an S corporation taxation, their income will be passed through their
Organizations with a charitable purpose can apply for federal tax-exempt status and be considered tax-deductible to the person contributing.
Forming a Nonprofit Corporation
There are requirements nonprofit businesses must meet, such as the following:
- The business must be created to organize and operate for different purposes, such as charitable, educational, religious, literary, scientific, public safety, or cruelty prevention. Examples of these entities include hospitals, charities, churches, foundations, and universities.
- Gains and assets cannot be distributed to directors, officers, or members.
- Remaining assets upon dissolution must be given to another qualified tax-exempt entity or group.
- The organization cannot participate in political campaigns for or against candidates in public office.
- The corporation cannot engage in grassroots legislation or any political activity except as permitted under federal tax rules.
If you plan to start a nonprofit business, you must know that financial and regular operations must be
made public to inform donors about how contributions are used.
Moreover, while some nonprofit corporations use only volunteer labor, others pay their full-time team members. Therefore, organizations must pay employment taxes and abide by workplace rules like for-profit businesses do.
- No Taxes Paid on Income
- Lower Postal Rates on Third-class Bulk Mailings
- Less Expensive Advertising Rates
- Eligibility for many state and/or federal grants
- Free Radio & TV Public Service Announcements (PSAs)
- Finances Open to Public Scrutiny
- Limited Lobbying
Types of Nonprofit Corporations
If you plan to register a nonprofit corporation, there are various types to consider. Each category has its own set of rules for tax-deductible contributions, lobbying, and eligibility.
Social Advocacy Groups
Social advocacy groups are classified under 501(c)(4) and promote a social or political effort. Examples of this nonprofit business include Greenpeace, the American Civil Liberties Union, and the National Association for the Advancement of Colored People. They engage in fundraising activities and lobbying to educate the public about their cause.
If your nonprofit organization is for labor, agricultural, or horticultural purposes, it falls under this designation. They aim to improve working conditions and increase efficiency.
This designation is for social and recreational purposes, such as hobby groups, country clubs, and sports leagues.
This nonprofit organization manages a teacher’s retirement fund. The sources of income are membership dues, investments, and tax proceeds.
The 501(c)(7) category aims to provide support and payment for individuals who are temporarily or permanently unemployed.
Veterans can join the designation of a nonprofit organization. For a 501(c)(19) to be considered eligible, 75% or more of its members must be active or past armed forces members.
Nonprofit Corporation Cost
The cost to start a nonprofit corporation can be categorized into filing fees and administrative
In filing fees, you must incorporate your state before you file for tax-exempt status with the IRS. However, the cost is significantly less than most IRS fees, with most states requiring between $50 to $400.
Administrative charges include office space and your staff. How much space will you need? Will you need computers, printers, and other supplies? Are you renting the space long-term? What benefits can you offer your team members?
Other charges you can consider are not required but can help promote your nonprofit corporation, including marketing efforts, software, and website and domain name purchase.