What is a Not-for-Profit Corporation?
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A not-for-profit corporation is one specifically formed for purposes other than operating a profit-seeking business. A not-for-profit corporation is a type of non-profit organization (NPO). They are also referred to as 501(c) corporations, named after the section in the Internal Revenue Code for the designation of non-profit organizations. Many NPO’s want to obtain 501(c) status to avoid paying federal income taxes and other types of state taxes. The purpose of the organization and the structure of the organization will determine whether a not-for-profit corporation will qualify for tax exemption status under 501(c).
Distinguishing Between Not-For-Profit and For-Profit Organizations
Even though the name not-for-profit implies that the NPO will not turn a profit, it is a mistaken belief that non-profits cannot and do not make money. Many actually do make money from their own charitable activities or from ways unrelated to non-profit purposes. The main structural component that distinguishes profit from not-for-profit corporations is how profits are distributed. In a for-profit corporation, the profits of a corporation can be redistributed to shareholders. In a not-for-profit corporation, the profits go back into the organization. In addition to how profits are distributed, the overall purpose of the organization will determine whether a corporation will qualify as a 501(c) not-for-profit corporation.
Qualifying for Tax-Exempt Status as a Non-Profit
In order to qualify for tax-exempt status as a non-profit, the overall purpose of the corporation must fit one of the 28 categories listed in section 501(c). Some of the most common examples of not-for-profit companies are ones with "charitable, religious, education, or scientific purposes." The NPO must file an application and submit a filing fee. Filing of the application alone is not sufficient. The IRS must receive and approve the application before the corporation can receive 501(c) status.
The 501(c) status affects the requirement of the not-for-profit corporation to file income taxes; however, it does not exempt the requirement of the NPO to pay employment taxes. Depending on the rules where the not-for-profit corporation is organized, the corporation may be required to submit additional applications with the state for tax exempt status.
Establishing a Non-Profit
For purposes of incorporating, setting up a non-profit is similar to setting up a regular for-profit corporation. A non-profit would enjoy some of the same common features such as being a separate legal entity and limited legal liability protection. The state where the organization is incorporated will set out the rules and requirements for establishing a corporation. However, a not-for-profit corporation is distinctive in two ways: first, the corporation cannot be organized for any person’s private gain; second, should it dissolve, the company must distribute its assets to a similar tax-exempt non-profit group.
Not-For-Profit Corporations and Contributions
The mere fact that a company is organized under a not-for-profit corporation law does not mean that contributions to it are necessarily tax deductible. For donations to be tax deductible, the charity must file an Application for Recognition of Exemption with the Internal Revenue Service. The application must be approved pursuant to Internal Revenue Code Section 501(c)(3).
The overlap of state and federal tax laws and incorporation rules can make obtaining and maintaining a not-for-profit corporation stressful. Consulting with an attorney that specializes in corporate or non-profit law can help minimize much of the confusion and frustration associated with the numerous filing requirements.