A nonprofit corporation is an entity formed for purposes other than making a profit. Nonprofit corporations are formed pursuant to different state laws than standard for-profit corporations; however, the process of forming a nonprofit is very similar.

To be considered tax-exempt, nonprofits must apply for federal and state (if applicable) tax-exempt status. Tax-exempt status is not automatically granted once the nonprofit corporation is formed. To apply for federal tax-exempt status, Form 1023 must be filed with the IRS. For state requirements, it is best to contact the department responsible for taxation in the state of formation.

Like standard for-profit corporations, nonprofits provide limited liability protection. The personal assets of the directors or officers typically cannot be used to satisfy the debts and liabilities of the nonprofit.

To qualify for federal tax-exempt status under 501(c)(3) of the Internal Revenue Code, the nonprofit must be organized and operate for some religious, educational, charitable, scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals or children purpose permitted under this section of the code.

Advantages of a Nonprofit Corporation

  • Directors are typically not personally responsible for the debts and liabilities of the nonprofit corporation.
  • Nonprofit corporations have the ability to apply for both federal and state tax-exempt status.
  • Certain nonprofit corporations are eligible to receive public and private grants, making the obtainment of operating capital easier.
  • With 501(c)(3) nonprofit corporations, all contributions are 100 percent tax deductible as a charitable contribution.

In order to form a nonprofit corporation, nonprofit articles of incorporation or a nonprofit certificate of incorporation must be filed with the appropriate state agency and the necessary state filing fees paid. The formation documents must include certain clauses and information, such as a very detailed business purpose statement, in order for the entity to qualify for tax-exempt status. Thereafter, form 1023 must be filed with the IRS in order to obtain tax exempt status.

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