Fact Checked

What is a Not-For-Profit Corporation?

Jen Silver
Jen Silver

A not-for-profit, or non-profit, corporation is a corporation that does not provide a profit to its owners and is considered a non-stock corporation. Much like a for-profit corporation, a non-profit must file a formation document called the Articles of Incorporation or Certificate of Incorporation, which is individualized by state. The group must select an organization name, usually with a corporate identifier label such as "Corporation," "Company," or "Limited." A specific business purpose must also be defined.

The most common type not-for-profit corporation includes public charities and private foundations. These groups typically focus on educational, religious, charitable, scientific, literary, and public safety issues. Some sports leagues and animal charities, however, are often classified as not-for-profit corporations as well.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

A non-profit must be registered at a registry of commerce. This usually is with an individual state's Secretary of State and a governmental taxing authority, such as the Internal Revenue Service (IRS) in the United States. Applicable state filing fees typically will need to be paid as well.

Not all not-for-profit corporations remain tax exempt, because some do make a profit. Typically, none of the income goes to members or owners of the organization. In order to establish federal tax-exempt status, a not-for-profit organization must file a Form 1023 and be approved by the IRS.

Not-for-profit corporations are incorporated businesses that typically have a board of directors and officers. These positions typically do not earn any profits from the business. Managers, however, can be paid salaries for working for the corporation.

A major challenge for not-for-profit corporations is securing funding, because these businesses do not grow profits like traditional businesses do. Non-profits are often scrutinized heavily by the IRS due to the benefits. They are also unable to contribute to political campaigns or major lobbying efforts.

Setting up a not-for-profit corporation is similar to setting up a typical for-profit organization. Most receive some of the same benefits of for-profit groups, such as creation as a separate legal entity and limited liability protection, which means directors and officers are typically not held accountable for the group's debts or liabilities. When a not-for-profit corporation dissolves, however, the organization must give away its assets to a similar tax-exempt non-profit group.

Additionally, it is important to keep in mind that donations to a not-for-profit organization are not automatically considered tax-deductible. In order to quality for this status, an organization must file an Application for Recognition of Exemption, or 501(c)(3) with the IRS. It is up to the individual who is making the donation to keep track of a corporation's tax-exempt status to ensure that the donation can be claimed on taxes.

Advantages of a not-for-profit corporation include access to grants, since some non-profits are eligible to receive public and private grants that might be a source of operating funds. Moreover, becoming a non-profit corporation can add credibility to a business. The public often associates a sense of legitimacy with businesses that have taken steps to register as such with the government.

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