A non-profit corporation, or non-profit organization, is a type of organization which exists to fulfill a non-monetary purpose. This is in contrast to a regular corporation which exists to make a profit.
In general, a non-profit corporation is structured and organized like a regular corporation. Non-profit organizations, however, have tax-exempt status and may be eligible for governmental funding and private funding.
In general, in order for an organization to qualify as a non-profit organization, it must be for one of the following purposes:
- Religious; and/or
In certain instances, groups or individuals can also qualify as non-profit organizations. This may include:
- Community service groups;
- Religious-based organizations; and
Examples of non-profit corporations may include, but are not limited to:
- Homeless shelters;
- Child care centers;
- Community care clinics; and
Commonly known non-profit corporations may include:
- Amnesty International;
- The Better Business Bureau;
- Big Brothers Big Sisters of America;
- The Red Cross; and
This is not, of course, an exhaustive list. In addition, non-profit organizations may vary widely as long as their purpose is one listed above.
Are Nonprofit Corporations Tax Exempt?
Yes, non-profit organizations are tax exempt. This means that the non-profit corporation is not required to pay any state or federal income taxes for any activities which are related to its state purpose.
In addition, if a private party donates or makes a contribution to a non-profit corporation, they can receive a tax deduction. In order for a non-profit corporation to keep their tax-exempt status, they are not permitted to:
- Contribute funds to political campaigns;
- Engage in lobbying which would have an influence on legislation to a substantial degree;
- Distribute profits to:
- directors; or
- members; and/or
- Make substantial income from activities unrelated to the stated purpose.
What Do Non-Profit Directors and Officers Do?
Non-profit corporations have directors, sometimes referred to as trustees, and officers which make management and policy decisions, similar to a regular corporation. In general, the officers and directors of a non-profit corporation are shielded from liabilities, including debts and lawsuits, of a corporation.
Although a non-profit corporation does not have shareholders, or owners, a non-profit corporation may have members who have voting rights.
Who Runs a Non-Profit Corporation?
Typically, a non-profit corporation is run by a board of directors. In certain states, they are known as trustees.
The main role of a board of directors is to set policies and oversee issues, including:
- Strategic planning; and
- Management-level hiring.
In a non-profit corporation, the board of directors will appoint officers. The majority of organizations have several positions, including:
- A president;
- A secretary;
- A treasurer; and
- Other positions, including a vice-president or an assistant secretary.
The positions which are filled will depend upon the needs of the organization and the requirements of local laws.
Can a Non-profit Organization be Held Liable for its Actions?
In most states, non-profit corporations are treated as legal entities which are capable of suing and being sued. Due to this, nonprofits must abide by a contract which is entered into.
A non-profit corporation must also exercise the same duty of care as any other type of corporation would under the same circumstances. In addition, because non-profit corporations are set up similarly to corporations, the board of directors and officers have limited liability.
For example, if a creditor comes after the corporation to satisfy a debt, it may only take assets from the corporation and not from the board of directors or officers personally or directly.
What Do I Have to Do to Form a Non-Profit Corporation?
There are several steps which are required to form a non-profit corporation. The first step is to file a certificate of incorporation with the state corporate filing office of the state in which the business will be located.
When filling out the forms, an individual will want to specifically fill out those which inform the state that they are applying for the status of a non-profit corporation. The state should provide guidelines to complete this process.
However, an individual may wish to consult with a commercial business attorney who can assist throughout this process to ensure the forms are completed fully and correctly.
How Can I Get Tax-Exempt Status for My Non-profit Corporation?
Even after an individual’s filings are approved by their state’s corporate filing office, their corporation does not automatically obtain tax-exempt status with the state and federal government. An individual is required to apply separately with the Internal Revenue Service (IRS) and, in some states, with the state itself.
An individual should file an IRS 501(c)(3) tax exemption application. It is important to ensure that the corporation has already been approved by the state as a non-profit corporation prior to filing this application.
This is because a copy of the field certificate or incorporation must be filed along with the 501(c)(3) application. In most states, the corporation will automatically be granted state tax exemption status along with their federal tax exemption status.
There are some states, however, that require a separate application for state tax exemption, including:
- Pennsylvania; and
- North Carolina.
I Have a Non-profit Corporation with Tax Exemption Status, Now What?
The first thing an individual will need to do once they have a non-profit corporation with tax exemption status, they will need to define some type of structure for their corporation. Rules and procedures, or bylaws, should be created for electing directors and officers, voting, and making decisions related to the non-profit corporation.
Once the non-profit corporation has a structure, directors should be appointed. Then, a directors meeting should be held in order to determine the direction of the non-profit corporation.
It is important to apply for any permits or licenses the non-profit corporation may need in order to accomplish that which it sets out to do.
How Can Non-Profit Corporations Limit Liability?
A non-profit corporation can take several steps to limit liability, including:
- Purchasing liability insurance;
- Including a liability limitation clause in contracts; and
- Producing and maintaining clear policies and procedures.
What Types of Disputes are Common with Non-Profit Corporations?
A non-profit corporation is a business, just like any other corporation. Non-profit corporations may face similar legal issues, including, but not limited to:
- Employment disputes such as:
- wrongful termination; and
- wage and hour disputes;
- Disputes regarding things provided by the corporation, including:
- products, and
- Non-litigation clauses, or clauses which place limitations on how disputes can be resolved, including mediation or arbitration;
- Disputes regarding renewal terms if the contract does not provide clear expiration and renewal terms; and
- Property disputes when the organization does not own the property they operate on or when they share that property with other organizations.
Legal remedies for breach of contract claims typically include a request for a damages award. This damages award is intended to compensate the plaintiff for financial losses which were caused by the breach.
Can an Attorney Help Me with the Process of Creating a Non-profit Corporation?
A business attorney can assist you with the process of creating a non-profit corporation. It may be helpful to select an attorney who is experienced with start-up companies, specifically non-profit organizations.
Your attorney can advise you of the laws governing non-profit corporations in your state, assist you with filling out any documents related to creating the non-profit corporation, and assist with applications for tax-exempt status. They can also assist you with planning to avoid future legal issues and represent you in court if a dispute does arise.