Generally, non-profit corporations are organized and structured like regular corporations. The primary difference between non-profit corporations and regular corporations is that nonprofits exist to fulfill a non-monetary purpose, whereas regular corporations exist only to make money.
Non-profits also stand out because they have tax-exempt status and are eligible for governmental and private funding.
What Groups Can Become Non-profit Corporations?
Qualifying as a non-profit depends on the activities the corporation will perform. Generally, a non-profit corporation’s purpose must be one of the following:
- Charitable
- Educational
- Literary
- Religious
- Scientific
Often, artists, community service groups, musicians, and religious-based organizations qualify as non-profit corporations.
What are Public-Benefit Nonprofit Corporations?
Public-benefit nonprofits are a type of nonprofit corporation created by a state government. They are organized primarily for social, educational, recreational, or charitable purposes.
Public-benefit nonprofit corporations are different legally from mutual-benefit nonprofit corporations in that they are organized for the general benefit of the public, as opposed to the interest of their members. Public-benefit nonprofits are also distinct from religious corporations.
What are Religious Nonprofit Corporations?
Religious nonprofit corporations are organized to promote religious purposes.
These corporations are recognized under the law on a state level. The government agency responsible for regulating religious nonprofits is typically the official holder of records, like the Secretary of State. Religious corporations are formed like all other nonprofit corporations by filing articles of incorporation with the state.
Articles of incorporation for religious corporations need to have the same standard tax-exempt language that the IRS requires for other nonprofits.
What are Mutual-Benefit Nonprofit Corporations?
Mutual-benefit nonprofit corporations in the United States are a type of nonprofit corporation created by a state government that exists to serve its members in other ways than distributing profits to them. For this reason, mutual-benefit nonprofit corporations cannot obtain non-profit status as charitable organizations.
Mutual-benefit corporations can be non-profit or not-for-profit, but they still have to pay regular corporate tax rates. Mutual-benefit corporations must pay the same taxes as regular for-profit corporations. Mutual-benefit corporations are still required to file tax returns and pay income taxes because they are not formed for a purpose that anyone would benefit from. Mutual-benefit corporations are formed for nonprofit purposes, such as managing associations or downtown business districts. Homeowners associations are also mutual-benefit nonprofits.
Are Non-Profits Tax Exempt?
A non-profit is not required to pay any federal or state income taxes for activities related to its stated purpose. Additionally, private parties who donate or make contributions to a non-profit corporation receive a tax deduction.
How Can I Incorporate a Nonprofit Business?
The first step for becoming a nonprofit organization is to register at the state level as a nonprofit corporation. Registering as a nonprofit organization requires you to create a board of directors and submit specific paperwork to your secretary of state. Include your articles of incorporation in this paperwork. Article of incorporation includes basic information about the nonprofit organization, such as its purpose, address, and officers. The process of incorporating a nonprofit organization is fairly simple. It can usually be done online, and typically requires a fee of $125 or less.
Nonprofits have no shareholders to pay dividends to. The profits that the organization makes are reinvested into the organization to promote its charitable mission. Once an organization is classified as a nonprofit corporation, it receives benefits from the state. These benefits include not having to pay sales taxes. Nonprofit corporations also have the opportunity to apply for certain types of grants.
What is Necessary to Obtain a Nonprofit Status?
Once a business has become a nonprofit corporation, it can apply for federal tax-exempt status. To apply for federal tax-exempt status, nonprofit corporations have to apply for a federal tax ID number and then apply to the Internal Revenue Service (IRS) to be recognized as tax-exempt.
The IRS classifies organizations differently depending on their purposes and activities. For example, trade organizations and community recreation organizations receive different designations. Organizations that support social welfare projects usually seek out non-profit status.
While nonprofit organizations may receive tax exemptions, meaning they don’t pay taxes on certain types of income, not all receive a charitable status that allows donors to receive tax writeoffs.
What are the Most Common Types of Nonprofit Designations?
501(c)(3) organizations start as nonprofit corporations and then become a federally tax-exempt charity that does not pay income or sales tax. These organizations allow donors to write off contributions. Many for-profit organizations, and even some nonprofit organizations, set up related 501(c)(3) organizations for charitable donations.
For example, a 501(c)(6) trade group for accountants may set up a 501(c)(3) nonprofit organization to collect and disburse money for scholarships or other educational purposes.
How Do Nonprofits Remain Compliant?
Your Secretary of State’s website contains information about what a nonprofit organization is and how they are incorporated. The website might have a directory of corporations you can search to find out information about individual corporations. Some directories proved year-end tax filings available to the public. Organizations with 501(c) designations file a Form 990 to remain compliant. Those forms are available to the public.
You can visit the nonprofit’s office and request to view documents or request the organization’s last three filings in writing. You can also contact the IRS to view the organization’s last three Form 990s, or search online for free downloadable copies.
Are There Any Limitations on the Activities of a Non-profit?
In order for a non-profit corporation to maintain its tax-exempt status, it must not engage in any of the following activities:
- Contribute money to political campaigns
- Engage in lobbying that would influence legislation to a “substantial degree”
- Distribute profits to officers, directors or members
- Make a “substantial” income from activities unrelated to its purpose
Furthermore, if the non-profit dissolves, it must distribute its money and assets to another qualified non-profit corporation.
Non-Profit Directors and Officers
A non-profit has directors (sometimes called “trustees”) and officers that make management and policy decisions, just like a regular corporation. Generally, the officers and directors are shielded from the corporation’s liabilities (such as debt and lawsuits) Although non-profits do not have shareholders (owners), a non-profit may have members with voting rights.
Should I Consult an Attorney With My Non-profit Corporation Issue?
Corporation laws vary depending on the state of incorporation. A business attorney will help you determine what you need to do according to your state law. Timelines and deadlines for non-profit incorporation are extremely strict in many states.
A lawyer can assist you with following all the detailed procedural rules, contacting all the necessary state and federal officials, and adhering to the deadlines for incorporating a non-profit corporation. Also, an attorney can give you advice as to the tax laws that will apply to your non-profit and help you follow your state’s procedural rules should you desire to dissolve.
If you’re in need of a business attorney, consider using LegalMatch’s services to narrow down your search for an attorney in your area. LegalMatch allows you to search for a lawyer based on the issues in your case. This is a great way to find the best attorney for your needs. There is never a fee to obtain a consultation. Rest assured that LegalMatch’s services are always entirely confidential.
