What is a Nonprofit Corporation?

Nonprofit organizations exist in three forms: tax-exempt, informal nonprofit or incorporated nonprofit. The term "nonprofit corporation" is an alternate name for an incorporated nonprofit. Nonprofit corporations are groups that form to achieve a mission and are not commercially oriented; they are not set up to issue stocks, pay dividends or otherwise redistribute surplus funds. A nonprofit corporation is a business entity that serves a public purpose in providing programs, policies and services of benefit to the organization rather than providing profits for individuals. Often, these corporations are service organizations or charities, and examples of large nonprofit corporations include the Red Cross, Amnesty International and Goodwill Industries.

A nonprofit corporation usually is configured in one of two ways: board-only or membership. Board-only nonprofits typically have boards that are self-selected and might or might not have a membership. The activities of this type of nonprofit are carried out only for the benefit of the public. In membership nonprofits, the board is elected, has regular meetings, bylaws might be amended by members, and its activities are designed to benefit members. Examples of a membership nonprofit would be the National Rifle Association, some golf clubs and some day cares.

The term "nonprofit" is something of a misnomer, because a nonprofit corporation does and should make a profit. A more accurate descriptor is "not-for-profit," and this is the term frequently found in legislation. The test of whether a corporation is nonprofit or for-profit is where the corporation’s profits come from and what is done with them. A nonprofit’s income might come from donations, grants or membership fees, among other sources. Any surplus, or profit, that is generated from this income must be kept by the corporation and used to pursue its goals and any future plans.

By incorporating, the nonprofit organization becomes a legal entity and is treated as a corporation. It can own property, hire employees, have a bank account, enter into contracts and perform all the same functions as an individual or a for-profit corporation. Organizing as a nonprofit corporation has several benefits. Tax-exempt status might be conferred, which would allow tax-deductible donations to be accepted. In addition, eligibility for public and private grants opens, and limited-liability protection for directors or other officers is acquired.

Internationally, countries vary in the laws that regulate establishing and managing nonprofit organizations. In the United States, nonprofit organizations are incorporated in the state where they will be doing business. An individual interested in setting up a nonprofit corporation will need to research the laws in his or her own location.