Non-Profit Corporation FAQ
Here are the answers to the questions we get asked most about non-profit corporations and organizations.
I've heard of them, but what exactly is a non-profit corporation?
A non-profit corporation is an organization that is incorporated for the purpose of carrying out a charitable, educational, religious, literary, or scientific purpose. Unlike conventional corporations, a non-profit corporation does not pay income taxes (state and federal) on profits it makes from engaging in activities related to the corporation's purpose. This tax exemption recognized by the IRS and state tax agencies supports the broader objective of a non-profit corporation to serve the public.
For a little background, non-profit corporations are sometimes referred to as "501(c)(3) corporations." This is because the most common federal tax exemption that applies to non-profit corporations is found in section 501(c)(3) of the Internal Revenue Code.
Are there benefits that come with forming a non-profit corporation?
Perhaps the biggest advantage of forming a non-profit corporation is that the corporation is not taxed on profits that it raises from activities related to the corporation's state purpose. In addition, non-profit corporations are allowed to raise money through public and private grants as well as donations from both individuals and companies. Indeed, the tax laws are even set up in a way that encourages individuals and companies to donate to non-profit corporations. Lastly (and like all corporations), the officers, directors and members of a non-profit corporation enjoy some limited personal liability from any liabilities of the non-profit corporation.
How do I go about forming a non-profit corporation?
As it turns out, forming a non-profit corporation is much like forming a conventional, for profit corporation. The first thing that you must do when forming a non-profit corporation is to file a document that is called the "articles of incorporation" with the appropriate division of your state's government (typically part of the secretary of state's office). When you file this document, you must also a pay a filing fee. The articles of incorporation typically need to contain:
- The name of the non-profit corporation,
- The non-profit corporation's address
- The name and address of the "registered agent," or "agent of register" for the non-profit corporation (this is the person that the public will contact in regards to lawsuits on behalf of or against the corporation), and sometimes
- The names of the officers of the non-profit corporation (depending on your state).
After you have filed your articles of incorporation, you need to apply for your non-profit corporation to receive state and federal income tax exemptions (with 501(c)(3) being the main exemption for federal income tax). This generally requires that you fill out a series of rather long forms.
Once you have applied for tax-exempt status for your non-profit corporation, you will need to draft a set of corporate bylaws. These rules set out the details for how the non-profit corporation will be run, including member voting rights. Lastly, before you start in on your business, you will need to elect a board of directors and hold an initial board meeting. At this meeting, the bylaws will be ratified.
Are there difficulties that come with running a non-profit corporation?
Running a non-profit corporation is much the same as running a for-profit corporation. When you are running a non-profit corporation, you must maintain an eye for details and keep accurate records. For example, meetings for the directors and members must be held and minutes of the meetings must be recorded for the records book.
In addition, the Internal Revenue Service will also have some issues that need to be taken care of. As an example, non-profit corporations cannot make political lobbying a substantial part of the non-profit's state goals and activities. In addition, the non-profit must ensure that its activities do not personally benefit its members, officers or directors.