If your business is being formed for purposes other than generating a profit and if no part of your organization's income will be distributed to your directors or officers, you may wish to form a nonprofit corporation. Nonprofit corporations are subject to state law and are often formed under the Revised Model Nonprofit Corporation Act (1986). Some examples of nonprofit corporations are churches, schools, charities, medical providers, legal aid societies, volunteer service organizations, professional associations, research institutes, museums, and (in some instances) sports associations.
Benefits of Nonprofit Status
The process for forming a nonprofit corporation involves some paperwork, but for many groups, the benefits are worth it. For example, nonprofit status is usually a requirement for obtaining funds from government agencies and private foundations. But there are other reasons to incorporate as well, including tax-exempt status and personal liability protection.
The most common federal tax exemption for nonprofit corporations comes from Section 501(c)(3) of the Internal Revenue Code. Tax-exempt status means that your group is not only free from paying taxes on all income from activities related to its nonprofit purpose, but those who donate to the organization can take a tax deduction for their contributions.
As with other types of corporations, the directors, officers and members of the nonprofit enjoy "limited liability." That is, they are protected from personal liability for the corporation's debts and legal obligations. This shield ensures that the finances and property of the individuals who manage, work for or participate in the business are protected if someone should gain a judgment against the corporation. There are a few situations in which people involved with a nonprofit corporation can be held personally liable for its debts, but insurance is available to cover some of these exceptions.
Forming and Operating a Nonprofit Corporation
As with other types of corporations, you must file articles of incorporation with the corporations division of your state government in order to form a nonprofit. But you must also submit applications for tax exemptions to both the state and federal governments. Once you have filed the initial paperwork, you will create your organization's corporate bylaws, which detail the organization's operating rules. Then you will elect the initial directors of your nonprofit and hold an organizational meeting of the board.
Nonprofit corporations are usually run by a board of directors, sometimes referred to as trustees in some states. The board sets policy for the corporation and is usually actively involved in the corporation's work. Officers, who sometimes receive salaries and may serve on the board, handle the organization's daily operations. Some nonprofit corporate structures have formal members with voting rights. But if there is no formal membership structure, the directors and officers are the only people who participate in management.
Nonprofit corporations, like other types of corporations, must keep good corporate records, including holding meetings of the directors and preparing minutes, as well as maintaining a separate bank account. Unlike regular corporations, however, a nonprofit may not distribute any profits to its members, make political contributions or engage in lobbying, except in limited circumstances.
Because there is no real ownership of a nonprofit corporation, it cannot be sold. Should the corporation's directors decide to dissolve it, all debts and obligations must be satisfied, and assets must be distributed to another tax-exempt nonprofit corporation.