What is a nonprofit corporation?
A nonprofit corporation is an organization dedicated to serving the public and is aimed towards particular social causes, such as charitable, educational, or religious matters. These types of businesses operate on creating social impact, rather than making a profit. They are granted tax-exempt status by the Internal Revenue Service (IRS) and have a different legal structure than that of ‘for-profit’ corporations.
Examples of nonprofit corporations include membership clubs such as the Elk's Club or a country club, churches and foundations. Nonprofit corporations are driven by their commitment to their donors, investors, volunteers, program participants, and the general public.
Differences between nonprofit and charity
Both nonprofits and charities can operate on a not-for-profit basis. The key distinction between the two is the size of the organizations, scale of their interests and the way they are funded.
Nonprofit corporation. It is an association, club or society that is operated for social causes. It is legally allowed to make a profit but not for personal gain. Instead, it can reinvest into the running of its mission such as paying staff, building infrastructure, or launching projects, but can also hire volunteers and apply for funding grants.
Charity. It is registered as a specific type of charitable organization, public foundation, or private foundation that uses its resources for activities like the relief of poverty, the advancement of education, religious missions and more. Its goals are philanthropic and one third of its funding must come from public contributions.
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The pros and cons of a nonprofit corporation
The pros of nonprofit status
No federal or state taxes on income.
It is eligible for both public and private grants as well as individual contributions.
It has limited liability, meaning the individual founders are completely separate from the nonprofit corporation and can be protected from the legal obligations.
It can employ paid workers as well as volunteers.
The cons of nonprofit status
Members of the board of directors cannot be paid, they must be volunteers.
It can require a lot of paperwork and an administrative budget is needed to pay lawyers, accountants and consultants.
It is a public domain that faces strict legislation and scrutiny; the general public can be critical of nonprofits paying their employees.
How to form and dissolve a nonprofit corporation
Consider a name for your nonprofit, then apply to your state agency and file “articles of incorporation” (this will vary according to your state or country).
File for state tax exemption and drafting bylaws that your nonprofit corporation will be governed by.
Appoint a board of directors who will be responsible for making policy and financial decisions. Each state has rules that determine the minimum number of directors that are allowed.
Create a nonprofit website to ensure that your mission can be found by the public.
Management. Nonprofits are managed according to a set of guidelines like any other corporation. You must keep records, prepare minutes of meetings and have a separate bank account. Decisions are made collaboratively by the board of directors and the executive director.
Dissolving. If you wish to close your nonprofit corporation, you will need to distribute any remaining assets to another nonprofit organization and social cause.
FAQ (Frequently asked questions)
What are the main types of nonprofits?
In the US they are an LLC, a trust, a corporation or a an unincorporated organization.
Can I run a nonprofit from home?
Absolutely. Just make sure to comply with all of the licensing regulations and laws related to starting a nonprofit, in your State or country.
How do nonprofits make money?
Nonprofits generate income through fundraising, investments and the selling of goods or services - the same way any business creates income.