From the Nolo eCommerce Center
Answers to your most frequently asked questions about nonprofit corporations.
- What is a nonprofit corporation?
- What are the benefits of forming a nonprofit corporation?
- How do I form a nonprofit corporation?
- Is it difficult to run a nonprofit corporation?
A nonprofit corporation is a corporation formed to carry out a charitable, educational, educational, religious, literary or scientific purpose. A nonprofit corporation doesn’t pay federal or state income taxes on profits it makes from activities in which it engages to carry out its objectives. This is because the IRS and state tax agencies believe that the benefits the public derives from these organizations’ activities entitle them to a special tax-exempt status.
The most common federal tax exemption for nonprofits comes from Section 501(c)(3) of the Internal Revenue Code, which is why nonprofits are sometimes called 501(c)(3) corporations.
Nonprofit corporations enjoy an exemption from corporate income taxes on profits from activities that are related to their organizational purpose. Also, a nonprofit is permitted to raise funds by receiving public and private grant money and donations from individuals and companies. (And the tax laws encourage people and businesses to donate money and property by allowing donors to deduct their contributions on their own tax returns.) Finally, structuring an organization as a nonprofit corporation protects its directors, officers and members from personal liability for the corporation’s debts and liabilities.
There are several steps you must take to create a nonprofit corporation. The first is filing a short document, usually called “articles of incorporation,” with the corporations division of your state government. To do this, you’ll have to pay a filing fee of $30 or so. Articles of incorporation contain:
- the name of your corporation
- the corporation’s address
- a “registered agent” (a person who agrees to receive legal papers on behalf of the corporation), and sometimes
- the names of the corporation’s directors.
After you file your articles, you must apply for state and federal income tax exemptions (the most common federal tax exemption comes from Section 501(c)(3) of the Internal Revenue Code), which require you to complete a fairly lengthy set of forms. You must also write “corporate bylaws,” a document that sets out the rules that govern your corporation, including procedures for making major business decisions, voting rights and other important guidelines. Finally, before you start doing business, you must elect a board of directors and hold an initial meeting of the board.
Although operating a nonprofit corporation requires some attention to detail, as long as you understand and follow some basic rules, you’ll be fine. The first rule is to hold required meetings of directors and members and to keep minutes of these meetings in a corporate records book.
The IRS also has a thing or two to say about what a nonprofit can and cannot do. For instance, a nonprofit cannot make political lobbying (influencing legislation) a substantial part of its total activities, and a nonprofit must make sure that its activities don’t personally benefit its directors, officers or members.
For more information about these and other rules, see Running Your Nonprofit Corporation.