What is a Nonprofit Corporation?
A nonprofit corporation is an organization formed to serve the public good, such as for charitable, religious, educational, or other public service reasons, rather than purely for the creation of profit itself, as businesses aim to do. The biggest benefit of choosing this form of legal entity is that it is exempt from paying federal and state taxes on any income the corporation earns, unlike for-profit corporations.
The most common tax exemption for nonprofits comes from Internal Revenue Service (IRS) Code Section 501(c)(3), which is why such organizations are often called 501(c)(3) corporations.
The process of creating a nonprofit corporation mirrors that of starting a corporation for business, or profit, purposes, but there are some unique pros and cons of choosing this form of legal structure.
Advantages of a Nonprofit Corporation
The pros of starting a nonprofit corporation are very appealing, including:
- No federal or state taxes on income the nonprofit earns
- It can receive donations from people.
- It can apply for and receive grants – essentially free money to support its cause.
- Board members are exempt from personal liability for corporate debts, just as with for-profit corporations.
- No real estate taxes need to be paid if a building is bought or sold.
- Public service announcements (PSAs) can be aired for free on TV and radio stations willing to accept them.
Disadvantages of a Nonprofit Corporation
While the advantages are significant, there are also disadvantages to be weighed:
- Members of the board of directors cannot receive payment for their service; they must be volunteers.
- If the nonprofit corporation shuts down or is closed down, its assets must be given to another nonprofit, rather than being distributed amongst its board.
- There is a lot of paperwork involved in both setting up, keeping annual records, and shutting down a nonprofit.
Essentially, a nonprofit corporation is created and managed much like a for-profit corporation, except that instead of dividing the year-end profits among the employees or shareholders, as public corporations do through dividends, nonprofit corporations reinvest any money earned back into its own operation, to serve more people.