What is a Nonprofit Corporation?
In a nutshell, a Nonprofit corporations 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
to be nonprofit, or tax exempt organizations. ("Tax
exempt is the term used for nonprofit 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 corporations.
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 often
are not well met by service providers to 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 also are 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 any number of reasons that an entity might
wish to organize as a nonprofit corporation. For some
nonprofits 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 religious organizations
and so-called
public benefit corporations. Public benefit corporations
are those that serve a scientific, literary, education,
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 nonprofit 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 staffs.
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 which operate for various
nonprofit purposes. Generally, no part of the net earnings
of such organizations may inure to the benefit of any
private individual or shareholders or the organization.
Types of Tax Exempt Organizations
The following list is exhaustive, but does not discuss
any of the limitations upon 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 or 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 football leagues
Clubs organized for pleasure, recreation, and other nonprofitable
purposes
Certain fraternal beneficiary societies, orders, or associations
Voluntary employees' beneficiary associations providing
for the payment of life, sick, 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 owned and operated exclusively for
the benefit of their members or which are not operated
for profit
Corporations chartered solely for the purpose of the
disposal of bodies by burial or cremation which are not
permitted by their charter to engage in any business
not necessarily incident to that purpose
Credit unions without capital stock 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 association 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 the purpose of satisfying liability for claims
under 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.
