What is a Not-for-Profit Corporation?

A nonprofit corporation is formed specifically to operate with a non-profit approach. This means that profits are distributed back into the corporation instead of to the shareholders. Corporations with not-for-profit status have special tax exemptions, but not all businesses qualify. Contributions to non-profit organizations are only tax-deductible if the org qualifies under IRS Code 502(c)(3). Learn more in our legal guide below.

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 16, 2021

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A not-for-profit corporation, also referred to as 501(c) corporations, is one type of corporation. It is specifically formed for purposes other than profit-seeking. A not-for-profit corporation by definition is a type of non-profit organization (NPO).

Many NPO’s want to obtain 501(c) status to avoid paying federal income taxes and other types of state taxes. The purpose of the organization and the structure of the organization will determine whether a not-for-profit corporation will qualify for tax exemption status under 501(c). Many people think of nonprofits as charitable organizations, but this isn’t always true. The goal of the nonprofit corporation can fall into many categories, not all of which could be described as “charitable.” If you look at some of the larger names we all know, they may look like profit institutions in many ways.

If you need help with not-for-profit corporation law, not-for-profit corporation tax issues, or other questions enter your ZIP code now.

What Is The Difference between Not-For-Profit and For-Profit Organizations?

The nonprofit name can be misleading. It is a mistaken belief that a non-profit corporation cannot and does not make money. Many actually do make money with organizations like Kaiser Permanente being considered industry giants.

The main structural component that distinguishes profit from not-for-profit corporations is how the profits are distributed. In a for-profit corporation, the income of a corporation can be redistributed to shareholders. In a not-for-profit corporation, the profits go back into the corporation. The process is ultimately regulated by a board of directors. It’s generally accepted that board members of charities are not paid directly. They can be reimbursed for expenses or get a tax break. In some corporate nonprofits, board members are paid regular salaries.

In addition to how profits are distributed, the overall purpose of the nonprofit organization will determine whether a corporation will qualify as a 501(c).

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How do non-profits qualify for tax-exempt status?

In order to qualify for tax-exempt status as a non-profit, the overall purpose of the corporation must fit one of the 28 types of organizations listed in section 501(c). Some of the most common examples of not-for-profit businesses are ones with “charitable, religious, education, or scientific purposes.” The NPO must file an application and submit a filing fee. Filing of the application alone is not sufficient. The IRS must receive and approve the application before the corporation can receive 501(c) status.

The 501(c) status affects the requirement of the not-for-profit corporation to file income taxes. It does not exempt the requirement of the NPO from paying employment taxes. Depending on the rules where the not-for-profit corporation is organized, the corporation may be required to submit additional applications with the state for tax-exempt status. Nonprofit institutions also have to adhere to a complex list of regulations. So while a charitable organization could get the bulk of their yearly operating budget from lobbying, they may not qualify to operate as a nonprofit. Alternatively, an organization within nonprofit sectors you might not think of as charitable could maintain nonprofit status by lobbying only within certain limits or not at all.

How are non-profits established?

For purposes of incorporating, setting up a non-profit is similar to setting up a regular for-profit corporation. A non-profit would enjoy some of the same common features such as being a separate legal entity and limited legal liability protection.

The state where the organization is incorporated will set out the rules and requirements for establishing a corporation. However, a not-for-profit corporation is distinctive in two ways.
First, the company cannot be organized for any person’s private gain.
Second, should it dissolve, the company must distribute its assets to a similar tax-exempt non-profit group. If the board decides to go through nonprofit conversion to a for-profit model, it’s essential organizers meet with a tax adviser and go through the right steps.

What About Not-For-Profit Corporations and Contributions?

The mere fact that a company is organized under a not-for-profit corporation law does not mean that donations made to them are tax deductible. For donations to be tax deductible, the organization must file an Application for Recognition of Exemption with the Internal Revenue Service. The application must be approved pursuant to Internal Revenue Code Section 501(c)(3). Again, donations are not tax deductible until it is approved.

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Where Do You Go for Questions about Tax-Exempt Organizations?

Corporate filing is just one of the complications for a new nonprofit to figure out. The overlap of state and federal tax laws and incorporation rules can make obtaining and maintaining not-for-profits stressful. It’s common for board members to be volunteers who may not have extensive business experience.

Consulting with an attorney that specializes in corporate or non-profit law can help minimize much of the confusion and frustration associated with the numerous filing requirements. In some cases, they can also connect you to accountants and others who understand the ins and outs of nonprofit law.

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