Non-Profit Corporation

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What is a Non-Profit Corporation?

A non-profit corporation is an organization formed for the purpose of serving a purpose of public or mutual benefit other than the pursuit or accumulation of profits. It is important to know what a nonprofit corporation is not. A nonprofit is not a way for ordinary businesses — or people — to shield assets or avoid paying income tax. It is not an alternative business form for any regular type of business.

Congress and the Internal Revenue Service have determined that only specific types of organizations can qualify as nonprofits or tax-exempt organizations. “Tax exempt is the term used for nonprofits by the IRS and most other government agencies.

Nonprofits are recognized and authorized by Congress (as well as state legislatures), which determined that certain types of enterprises should be free from the burden of having to pay income taxes. It also decreed that society should support and foster many such organizations. In order to accomplish these goals, it established a class of entity now known as a tax-exempt corporation, or nonprofit corporation.

In giving these corporations tax-exempt status, however, Congress imposed specific requirements and limitations on their activities. The IRS tends to strictly enforce these rules. Failure to “play by the rules” can result in the corporation losing its tax-exempt status. These limitations on nonprofit corporation activities and operations are what give them unique needs that are often not well met by service providers for for-profit businesses.

However, a nonprofit corporation is not prohibited from making a profit, but there are limitations on what it can do with its “profits.” There are also limitations on how it can make money. For example, if a nonprofit corporation engages in profit-making activities unrelated to its recognized nonprofit purpose, it must set up a separate corporation to engage in that activity or risk losing its nonprofit, or tax-exempt, status.

There are a number of reasons that an entity might wish to organize as a nonprofit corporation. For some non-profits, it may be to attract donations that are tax-deductible to the donors. Many grant-making organizations will only grant money to nonprofit corporations. Other groups may form a nonprofit corporation to take advantage of an applicable exemption from paying income taxes as afforded by the Internal Revenue Code. Indeed, the IRC (as tax lawyers and accountants like to refer to it) lists more than two dozen general types of recognized nonprofit corporations.

The types of nonprofit corporations with which most of us are familiar with are religious organizations and so-called public benefit corporations. Public-benefit corporations are those that serve a scientific, literary, educational, artistic or charitable purpose that benefits the public. In the nonprofit world, these are known as “501(c)(3)’s.” This number refers to the section of the Internal Revenue Code under which public benefit corporations may be organized.

Using 501(c)(3)’s as our example, we will briefly explore the unique conditions and needs of a non-profit corporation. For example, most public benefit corporations survive on a combination of donated or granted income, donated facilities and equipment, and low-paid or volunteer staff. In other words, their base activities do not generate sufficient income to meet their financial needs. Frequently, they are struggling just to survive.

The Internal Revenue Code allows for tax-exempt status for many types of organizations that operate for various nonprofit purposes. Generally, no part of the net earnings of such organizations may go to the benefit of any private individual, shareholder, or shareholders of the organization.

IRS Form 1023

On the federal level, IRS Form 1023 must be completed to qualify for 503(c)(3) federal tax-exempt status. Although certain groups are not required to file Form 1023, it is recommended that these exempt organizations submit the filing nonetheless in order to ensure that the IRS views the organization as a tax-exempt entity. Once a corporation’s 501(c)(3) filing is approved by the IRS, the non-profit can rest assured that its tax-exempt status cannot later be challenged.

IRS Form 1023 must be filed within 15 months of the filing of the entity’s articles or certificate of incorporation. If filed in a timely manner, the tax exemption will be retroactive and will apply to the date of incorporation.

Types of Tax Exempt Organizations

The following list is exhaustive but does not discuss any of the limitations on the activities of such organizations, which in many cases are considerable. Also, some organizations of the types listed may not qualify for non-exempt status for various reasons specified in the Internal Revenue Code, regulations, or common law as determined by the Courts. The Nonprofit Resource Center strongly suggests that, if you are considering forming a tax-exempt organization, you consult with an attorney familiar with the law of nonprofit and tax-exempt organizations.

  • Certain corporations organized under an Act of Congress
  • Certain corporations organized and operated exclusively for:
    • Religious purposes
    • Charitable purposes
    • Scientific purposes
    • Purposes of testing for public safety
    • Literary purposes
    • Educational purposes
    • Artistic purposes
    • Health care and public health
    • Fostering national or international amateur sports competition
    • The prevention of cruelty to children or animals
  • Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare
  • Local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.
  • Labor organizations
  • Agricultural or horticultural organizations
  • Business leagues
  • Chambers of commerce
  • Real estate boards
  • Boards of trade
  • Professional or non-professional sporting leagues
  • Clubs organized for pleasure, recreation, and other nonprofit purposes
  • Certain fraternal beneficiary societies, orders, or associations
  • Voluntary employees’ beneficiary associations provide for the payment of life, sickness, accident, or other benefits to the members of such association or their dependents or designated beneficiaries
  • Teachers’ retirement fund associations of a purely local
  • Certain benevolent life insurance associations of a purely local character
  • Cemetery companies are owned and operated exclusively for the benefit of their members or are not operated for profit.
  • Corporations chartered solely for the purpose of the disposal of bodies by burial or cremation are not permitted by their charter to engage in any business not necessarily incident to that purpose.
  • Credit unions without capital stock are organized and operated for mutual purposes and without profit.
  • Insurance companies or associations other than life if the net written premiums for the taxable year do not exceed $350,000.
  • Corporations organized by certain associations for the purpose of financing the ordinary crop operations of such associations.
  • A trust or trusts forming part of a plan providing for the payment of supplemental unemployment compensation benefits.
  • A post or organization of past or present members of the Armed Forces of the United States, or an auxiliary unit or society of, or a trust or foundation for, any such post or organization
  • Legal services corporations
  • Trusts for satisfying liability for claims under the Black Lung Acts
  • Multi-employer trusts created to pay any amount described in Section 4223(c) or (h) of the Employee Retirement Income Security Act of 1974
  • Corporations or trusts organized for the exclusive purposes of acquiring and holding title to real property for the benefit of a qualified pension, profit sharing, or stock bonus plan

Diversified Corporate Services can efficiently and cost-effectively form your Non-profit corporation in all 50 States, as well as in the District of Columbia. If you have more questions regarding Non-profits, be sure to speak with an attorney, CPA, or financial advisor.

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