What is a Not-for-Profit Corporation?

A not-for-profit corporation is formed specifically to operate with a non-profit approach, meaning 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 will 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: Jan 21, 2021

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A not-for-profit corporation, also referred to as 501(c) corporations, named after the section in the Internal Revenue Code for the designation of non-profit org, is one of the possible types of corporations that, in this case, is specifically formed for purposes other than operating a profit-seeking business. 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).

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 distinction between not-for-profit and for-profit types of organizations?

Even though the name not-for-profit implies that the NPO will not turn a profit, it is a mistaken belief that a non-profit corporation cannot and does not make money. Many actually do make money from their own charitable activities or from ways unrelated to non-profit purposes.

The main structural component that distinguishes profit from not-for-profit corporations is how 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.

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 categories 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; however, it does not exempt the requirement of the NPO to pay 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.

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.

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 contributions to it are necessarily tax deductible. For donations to be tax deductible, the charity 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).

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How can you get help with not-for-profit status?

The overlap of state and federal tax laws and incorporation rules can make obtaining and maintaining not-for-profits stressful. 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.

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