What Is a Non-Profit Corporation?

Most people are familiar with the words “non-profit” and “corporation,” but it’s likely they haven’t always heard them together. When most think of non-profits, they think of charitable organizations like animal rescue groups. They would never assume that these non-profits are (in some cases) also technically corporations.

However, a charitable organization can be incorporated. Having incorporated status provides certain protections for non-profits, and it also sets up a structure for how they are to be run. Meanwhile, being non-profit provides perks that a for-profit corporation wouldn’t receive, especially when it comes to taxes.

Today, we’ll explain exactly what a non-profit corporation is. You’ll learn why this type of non-profit organization is considered a corporation and how that affects the way the non-profit is run. We’ll also discuss how non-profits are taxed and the benefits and limitations that non-profit status provides.

What Is a Corporation?

Most of us understand what a non-profit is. It’s an entity that uses donations or other such proceeds for charity. To understand what a non-profit corporation is, it’s helpful to know more about corporations and what exactly they are.

A simple Google search provides this definition for a corporation: “a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law.” To put it in plain English, a corporation is formed by a group of people with a common goal. The corporation itself is treated as its own entity, separate from those who own it (who are often called shareholders).

As such, a corporation can take out loans, sue and be sued, and own its own assets. It must also pay taxes. Because the corporation is separate from its shareholders, the shareholders’ personal assets are not at stake should the corporation face debts, lawsuits, or any other financial trouble.

As you can see, there are a number of legal benefits to incorporation, which is why some non-profits choose to become incorporated. Allowing the non-profit to own assets and take out loans means that those running it do not have to personally shoulder all the financial responsibility.

How Are Non-Profit Corporations Run?

group of hands forming a heart

A large part of what makes a non-profit corporation a corporation is the way that it is governed. Non-profit corporations follow the same structure as any other corporation.

Conversely, in a for-profit corporation, shareholders elect a board of directors to oversee the company. Non-profits do not have shareholders because they own part of the company and receive dividends due to that ownership. Since no one is making a personal profit, there are no shareholders.

Still, non-profit corporations do elect a board of directors — which are usually volunteers — though they can be employees. In most corporations, the board of directors is responsible for setting broad goals for the company.

These entities also appoint senior executives such as company presidents, vice presidents, secretaries, and treasurers. Many non-profit corporations follow this same structure.

How Are Non-Profit Corporations Formed?

Laws vary by state, so the process of forming a non-profit corporation also varies by state. However, there will be some similarities. First, the non-profit must become incorporated.

To do this, those creating the non-profit corporation must file articles of incorporation. They must also elect a board of directors. Sometimes, those founding the non-profit corporation will be the directors, though they don’t have to be. In a non-profit, the directors are typically volunteers.

Bylaws are often put into place upon incorporation, though they aren’t always required by law. Bylaws set a number of rules for how the corporation is to be run. They determine things like how often the directors should meet as well as terms of office.

Once the non-profit is incorporated, the next step is to apply for tax exemption, which will recognize the corporation as a non-profit under the law. Before a corporation can become tax-exempt, it must have an Employer Identification Number (EIN) which can be requested from the IRS.

After that, the corporation can file Form 1023 for charitable organizations or Form 1024 for other tax-exempt organizations. These typically require a filing fee. If the IRS accepts the application, the corporation will be recognized as tax-exempt and will have official non-profit status.

How Are Non-Profit Corporations Taxed?

It’s worth noting that non-profit corporations are exempt from paying certain taxes. For instance, they’re often exempt from paying sales and property taxes. The big one is that they don’t have to pay federal income taxes. As we explained previously, a non-profit corporation must apply for these exemptions through the IRS.

While non-profits are exempt from other types of taxes, they may still have to pay employment taxes. Non-profit corporations can have many volunteers running the show, but there may be some people who work for the non-profit as employees and thus need to be paid. It is common for non-profits to have a number of employee positions as there is often a need for reliable full-time workers.

As you can see, though non-profit corporations are incorporated, they do not have to pay many of the taxes that for-profit corporations have to pay. Non-profits are allowed to apply for these tax exemptions because the income they generate is used for charity.

How Do Non-Profits Use Their Income?

glass jar labeled charity with plastic hearts

You’ve probably already noticed some glaring differences between for-profit and non-profit corporations, especially when it comes to taxes. However, how these two entities use their profits is yet another difference between them.

Though they are called “non-profit,” these types of corporations can and do generate revenue. This can be through donations, fundraising, or selling goods in physical or online stores.

Non-profits use that money to pay any bills they have, such as rent, electricity, sewage, and internet and phone service. Once they’ve paid for all the necessities, extra funds are put back into the non-profit to be used in charitable ways.

Benefits of Being a Non-Profit Corporation

There are many benefits of being a non-profit corporation. One of the most obvious benefits that we’ve already talked about is the tax exemptions.

Non-profit corporations enjoy other perks, too. Thanks to their incorporated status, members of a non-profit will never have to worry about their personal assets being up for grabs if the company runs into any financial trouble.

There are also grants available to non-profits that, along with donations, can reduce the necessity for borrowing money (or at least reduce the amount the non-profit needs to borrow).

Because non-profits help the public, they can receive certain services for free. These could be physical services given voluntarily by a professional (for instance, a vet offering free exams to the residents of an animal shelter), or they can be services such as a network allowing the non-profit to run ads for free on a local television station.

Another benefit of non-profits is donations, as these can be tax-deductible if the non-profit has gone through the steps with the IRS to make it so. These non-profits usually provide a donation receipt for your records.

Limitations of Being a Non-Profit Corporation

You now know that non-profit corporations enjoy some perks thanks to their non-profit status. However, there are some limitations as well.

One such limitation has to do with politics. Non-profits are not allowed to donate money to political campaigns, nor can they engage in lobbying activity. If they do, they can lose their tax-exempt status.

Another thing to bear in mind about non-profit corporations is that the money they make is only meant for the public good and never for personal gain. Therefore, whenever a non-profit corporation dissolves, any assets it has must be donated to another non-profit organization.

Assets cannot be dispersed amongst the founders, board of directors, or volunteers. They must be given away to charity.

Corporate Structure With a Charitable Heart

Non-profit corporations are charitable entities that use their revenue for the good of the public. They are incorporated and follow the structure of corporations, which involves electing a board of directors to oversee the broad goals of the company. Incorporation also provides limited liability protection.

As you can see, there are good reasons why a non-profit would choose to be incorporated. At the same time, being a non-profit brings a host of other benefits, especially when it comes to taxes.

Non-profits are exempt from paying federal income taxes because the revenue they make is used for charitable means. They can also be exempt from paying property and sales taxes.

Even though the formation of a non-profit corporation can be a bit of a process, it’s often worth it. Non-profit corporations allow people to do good for their community without having to worry about losing their personal assets or having donations eaten up by taxes.

Team BusinessNerd

Our team of legal experts and business professionals have years of experience and are dedicated to providing accurate and up-to-date information to our readers.

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