A nonprofit corporation is an entity formed for purposes other than generating profit for owners or shareholders. Nonprofit corporations are commonly formed for charitable, religious, educational, scientific, literary, civic, social, professional, or other nonprofit purposes.
A nonprofit corporation is formed under state law by filing nonprofit Articles of Incorporation, a Certificate of Incorporation, or a similar formation document with the appropriate state filing office and paying the applicable state filing fees. Although the filing process is similar to forming a for-profit corporation, nonprofit corporations are subject to different state-law requirements and must be organized for a nonprofit purpose.
Forming a nonprofit corporation does not automatically make the organization tax-exempt. To be recognized as exempt from federal income tax, most organizations must apply to the Internal Revenue Service. Organizations seeking recognition under Section 501(c)(3) generally apply by filing Form 1023 or, if eligible, Form 1023-EZ. The IRS states that Form 1023 is used to apply for recognition of exemption under Section 501(c)(3), and Form 1023-EZ is available for eligible organizations applying for recognition under the same section.
Certain organizations, such as churches and certain church-related organizations, may be treated as tax-exempt under Section 501(c)(3) without applying for formal IRS recognition, provided they meet the applicable requirements. However, many organizations still choose or need to obtain an IRS determination letter for practical, grant, banking, donor, or compliance reasons.
State tax-exempt treatment may require a separate application or registration with the applicable state tax department. In addition, nonprofits that solicit charitable contributions may need to register with one or more state charity regulators before fundraising.
Like standard for-profit corporations, nonprofit corporations generally provide limited liability protection. Directors, officers, and members, if any, are typically not personally responsible for the debts and liabilities of the nonprofit solely by reason of serving in those roles. However, exceptions may apply, including for misconduct, unpaid payroll taxes, personal guarantees, breach of fiduciary duties, or other legal grounds for personal liability.
To qualify for federal tax-exempt status under Section 501(c)(3), an organization must be organized and operated exclusively for one or more exempt purposes. The IRS identifies qualifying purposes as charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The organization’s earnings may not inure to the benefit of private shareholders or individuals.
Potential Advantages of a Nonprofit Corporation
- Limited liability protection: Directors, officers, and members are generally not personally responsible for the debts and liabilities of the nonprofit corporation.
- Ability to apply for tax-exempt status: A nonprofit corporation may be eligible to apply for federal and state tax-exempt status, depending on its purpose and activities.
- Grant eligibility: Certain nonprofit organizations may be eligible to apply for public or private grants.
- Fundraising opportunities: Recognition as a 501(c)(3) organization may make the organization eligible to receive tax-deductible charitable contributions, subject to IRS rules and donor-specific limitations.
- Separate legal existence: A nonprofit corporation exists separately from its founders, directors, officers, and members, which can help support continuity of the organization.
- Formal governance structure: A nonprofit corporation generally operates through directors and officers, with bylaws and other governance documents establishing internal procedures.
- Public mission: A nonprofit corporation can provide a formal structure for pursuing charitable, educational, religious, scientific, or other nonprofit purposes.
To form a nonprofit corporation, nonprofit formation documents must be filed with the appropriate state filing office. If the organization intends to seek 501(c)(3) status, the formation documents should include appropriate purpose and dissolution language that satisfies IRS requirements. The organization should also adopt bylaws, appoint directors and officers, obtain an EIN, and maintain corporate records.
After formation, the organization may need to apply for federal tax-exempt recognition, apply for state tax exemptions, register for charitable solicitation purposes, obtain business licenses, and comply with ongoing federal and state filing requirements. Many tax-exempt organizations are also required to file an annual information return with the IRS, such as Form 990, Form 990-EZ, or Form 990-N, depending on the organization’s size and classification.
