Making money is among the priorities of almost every business—but not the main goal for every business, especially those looking to serve the greater good. Some companies whose work is mission-driven may be looking to make a difference rather than make a profit. These businesses often set themselves up as nonprofit corporations.
What is a nonprofit corporation? It’s a type of business entity that enables you to gain certain tax benefits and advantages upon establishment. There are only certain types of groups and organizations that can apply for and gain nonprofit approval for tax-exempt status. In other words, not every business qualifies to be a nonprofit, and it’s not a fit for every organization. But if you’re interested in learning about what a nonprofit corporation is, whether it’s right for your business, and how to establish one, we’ll review it all here.
Nonprofit Corporation Definition
It’s all in the name: A nonprofit corporation is a type of business whose main purpose is not to make money. Sometimes, these are charities or goal-oriented organizations; other times, they’re institutions such as schools or religious organizations. There are nonprofit corporations that are, indeed, profitable, but the difference between another type of corporation is that if you’re registered as a nonprofit then you’re required to put all of the earnings back into the organization and its mission.
Nonprofit Corporations vs. For-Profit Corporations
The name “nonprofit corporation” can be a bit misleading. As we mentioned above, nonprofit corporations often make a lot of money—often, more than their operating expenses actually cost, meaning that they’re profitable from a profit and loss standpoint. But, for nonprofit corporations, it’s not a question of whether or not you’re making a profit; rather, it’s how the organization is set up, its purpose, and who is involved.
Characteristics of Nonprofit Corporations
- Does not seek to make money from its operations
- Money earned is invested back into the company or the mission
- Corporation is mission-driven, not profit-driven
- If the organization fails, any money not used to address debts must go into another nonprofit
- Owned by the public
- Accountable to the federal government
- Can raise money from the general public, corporations, foundations, or individuals who do not expect a return
Characteristics of For-Profit Corporations
- Seeks to make money from company’s goods or services
- Shareholders, employees, and other stakeholders profit from the company’s activities
- Controlled by private interests
- Profit is generally the measure of success
- Can raise money from private investors who expect a return on investment
What Kind of Businesses Form a Nonprofit Corporation?
In general, the businesses that form a nonprofit corporation are charitable, mission-driven, or have a greater purpose beyond serving the interests of shareholders. The following are common types of organizations that may file to become a nonprofit corporation:
- Animal shelters and rescues
- Environmental groups
- Human rights and social advocacy groups
- Educational institutions
- Religious institutions
- Trade or professional groups
- Federal credit unions
- Scientific and research groups
- Veterans’ groups
This is not an exhaustive list—there are other, very specific types of organizations that qualify, too—but you should be able to get a sense of what qualifies based on these categories. You can also review lists from the IRS to see if the function you perform qualifies.
Examples of Nonprofits
Organizations you know, both big and small, are incorporated as nonprofit corporations. Here are a few examples:
- American Red Cross
- New York Public Library
- St. Jude Children’s Research Hospital
- National Geographic
- Doctors Without Borders
- Boy Scouts of America National Council
- Ohio State University
- Christian Broadcasting Network
- Habitat for Humanity
- United Way
- Society for Human Resource Management
…and (literally) millions more. An organization’s nonprofit and tax-exempt status are available as public information, so if you’re curious as to whether a certain business is a nonprofit corporation, you will likely be able to find out.
Why Would You Form a Nonprofit Corporation?
Now that you’re hopefully clear on what a nonprofit corporation is, you’ll find that there are many benefits to forming this business structure.
Tax Advantages of Nonprofit Corporations
The main advantage of forming a nonprofit corporation is tax advantages. Nonprofits are often partially or entirely exempt from federal, state, and local taxes. You’ll also potentially be able to receive credits and deductions. If you sell something, you may also be exempt for things like sales tax, and you also may not have to pay property taxes.
In order to see what tax advantages your nonprofit may enjoy in your area, you’ll want to check local-area laws.
Other Advantages of Nonprofit Corporations
Here are a few more advantages you’ll find if you incorporate as a nonprofit corporation:
- The ability to apply for and receive certain grants restricted to nonprofits
- Legal protection for members (only the assets are subject to legal action in the case of a lawsuit, not the proprietors of the organization—much like an LLC creates separation between personal and business assets and identity)
- Discounts on essentials such as postage, advertising, and more
- Credibility for your organization and its goals
Nonprofit Corporation Restrictions
There are a also few restrictions worth noting if you pursue this path. Among them are:
- Restrictions against lobbying
- Limit against functions in order to qualify for nonprofit activities
- Unable to collect profits from activities
These regulations sometimes change, so you’ll want to review them before you start your business, especially so you don’t jeopardize your nonprofit status.
Types of Nonprofit Corporations
There are about 30 different types of nonprofit classifications as noted by the IRS. Your classification (and any restrictions or benefits associated with this status) will depend on the type of function that your organization carries out. Here are a few major types to know about:
- 501(c)(3): This is probably the type you’ve heard the most about, because most nonprofits fall under this classification. This is for charities. All 501(3)(c) income and donations are tax exempt.
- 501(c)(4): These types of organizations are social advocacy groups.
- 501(d): This is for religious organizations.
- 501(k): These include child care organizations.
Again, there are hyper-specific types of nonprofit corporation designations—including farm and crop organizations, veterans’ organizations, and more—so you’ll want to review the list to see where you fall.
How to Form a Nonprofit Corporation
If you find that a nonprofit corporation is correct for your type of business or company, you need to take a few steps to incorporate as a nonprofit (also called forming a nonprofit). Here are the main steps to consider:
1. Choose a name.
This one’s pretty self-explanatory, but remember that your business name will help communicate your mission, since nonprofits are generally involved in public advocacy and development. There might be a few laws and restrictions on naming that are specific to your state, so be sure to check those.
2. Decide on a board of directors and draft bylaws.
You’ll need to draft bylaws that govern the purpose, mission, and procedures associated with your nonprofit. Then, choose the people who will helm your organization and enforce these bylaws. Some states require multiple directors to be involved; others require only one. You’ll want to check your local laws and may seek a business attorney to help you navigate this process more easily.
3. File your articles of incorporation.
To form a nonprofit, you’ll need to file articles of incorporation, which is formal paperwork declaring your group as a nonprofit. (This is much like filing paperwork as a for-profit business.) How to do it—as well as the small fee you’ll incur for doing so—will depend on the state in which you incorporate. You can look up some of the guidelines for doing so, as well as specific language you may have to use in order to ensure your tax-exempt status.
4. Apply for your tax-exempt status.
Simply incorporating doesn’t automatically give your nonprofit organization tax-exempt status. You’ll need to file some additional paperwork so the IRS will recognize you as tax exempt. Depending on the type of nonprofit corporation you form, you’ll have to fill out some different paperwork. This will depend on the type of work that you do as well as the size of the organization you’re forming. This nonprofit IRS guide can help you figure out what you need to send over.
5. Obtain any licenses and permits you need.
You may need to apply for and get approval for federal, state, and local business licenses and/or permits to carry out your nonprofit corporation’s function.
The Final Word
Forming a nonprofit corporation is not for every business—some might have different goals or missions. But if you’re excited about doing something for the greater good, a nonprofit can help your organization accomplish the goals that you need by providing benefits, credits, exemptions, and special benefits. Forming a nonprofit isn’t hard, just make sure you pay attention to the details so you can take advantage of those benefits. The work upfront is worth the good you’ll do later on.