A nonprofit corporation is a corporation that is formed pursuant to a different state law than a standard for-profit corporation. The corporation must be formed for some religious, charitable, educational, literary or scientific purpose. While a standard business corporation is designed to benefit and generate a profit for its shareholders, nonprofits do not have the profit motive. Nonprofit corporations are allowed to apply for tax-exempt status at both the federal and state level.
If your nonprofit is granted tax-exempt status under 501(c)(3) of the Tax Code, your corporation will be exempt from payment of federal corporate income taxes. With federal income tax rates between 15% and 34%, this can amount to quite a tax savings.
A 501(c)(3) nonprofit is eligible to receive both public and private grants. Individual donors can claim a federal income tax deduction of up to 50% of income for donations made to 501(c)(3) groups.
Nonprofits also receive the same limited liability protection as for profit companies. This means that directors or trustees, officers and members are typically not personally responsible for the debts and liabilities of the nonprofit corporation.
Other benefits include:
- A corporation's life is not dependent upon its members. A corporation possesses the feature of unlimited life. If an owner dies or wishes to sell his/her interest, the corporation will continue to exist and do business.
- Retirement funds, qualified retirement plans (like 401k) may be set up more easily with a corporation.
- 503(c)(3) corporations receive lower postal rates on some bulk mailings.
However, there are some disadvantages to forming a nonprofit corporation. The main disadvantage of forming a nonprofit company is the increased paperwork that is required. Articles of incorporation must be filed with the state, bylaws prepared and meeting minutes must be kept with your corporation?s records. Also, applications for tax-exempt status must be filed at both the federal and state levels.
It is important to remember that nonprofits can not be used to generate profits for the owners, and the purpose must confirm to IRS regulations.
