Non-Profit Corporations Under the Law

While many businesses are formed with the intent of bringing profits to owners and shareholders, this is not the only model of business formation. For individuals interested in starting companies that provide goods or services to others or act to advocate on behalf of societal causes and needs, there is a special business status available, known as the non-profit organization, or, according to the Internal Revenue Service, the 501(c)(3).

Non-profit organizations are a special corporation status dedicated to entities with a charitable, educational, religious, literary, or scientific purpose. The primary advantage of non-profit corporation status is that it exempts the corporation from certain federal, state, and local tax requirements, and thus the entity does not pay taxes on money it raises to support its objectives. Additionally, individuals who donate money to a non-profit corporation that has 501(c)(3) status can receive an individual deduction for their contributions to the non-profit.

Forming a Non-Profit Corporation

Non-profit formation is similar to normal corporate formation in many respects, but with the additional requirement of qualifying for tax-exempt status. The non-profit must choose a name and an indicator, such as “incorporated,” that indicates corporate status. The entity must then file articles of incorporation with the applicable state office and provide any additional information required under state law, such as an address or the names of officers. Next, the entity must apply for 501(c)(3) status by completing a 501(c)(3) application with the IRS. Filing for this status can be complicated and may require the assistance of a corporate attorney. It is also important to determine whether the non-profit is required to file a separate application for state non-profit status. In some states, 501(c)(3) status is sufficient, while others require a separate detailed process for state recognition.

Tax Exemption

Once a non-profit corporation obtains tax-exempt status, it must take certain steps and refrain from certain activities in order to retain that status. Non-profit corporations must make sure to keep excellent financial records that carefully document how funds are obtained and used so that they can provide explanation for the profits of the non-profit corporation and file comprehensive corporate tax returns. Additionally, non-profits must refrain from certain activities in order to keep their status.

Raising Funds as a Non-Profit

Fundraising is a central goal of many non-profits, since it is often one of the only ways that they obtain money to support the causes and missions that are at the heart of the organization. In many states, before a non-profit corporation can begin to solicit funds from individuals, it must first register as a non-profit organization that will be soliciting contributions. This is not a difficult process and primarily requires the non-profit corporation to file an application with the relevant state agency. Once the non-profit is registered, it is free to solicit funds through a wide range of means, including events, telephone calls, and appeals via mail. However, if donations are not in the form of cash, but goods or property, non-profits should be careful to abide by the IRS requirements for reporting these types of donations, including accurate appraisal of the items.

Last reviewed October 2024