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Forming a Non-Profit Corporation

A non-profit corporation is an entity that provides many of the benefits of regular C corporations, but is created for reasons other than generating a profit from its activities. This does not mean a non-profit is prohibited from generating more income than it expends: Its tax-free profits can go to pay reasonable salaries or to further the cause espoused by the organization.

The most common form of non-profit is known as a 501 C3 (exempt from federal corporate income tax under the Federal Internal Revenue Code section 501 C3). It must be formed for charitable, educational, religious, literary or scientific purposes for the benefit of the public. Among others, a non-profit can be:
  • a church
  • public school or public charity
  • medical provider or hospital
  • political organization
  • legal aid society
  • museum
  • volunteer services organization
  • research institute
  • sports association
  • professional association
  • legal aid society

  • Non-profit status allows individuals to contribute money to your enterprise tax free, and foundations and government entities to give tax-free grants to your operation. No portion of your organization's income can be distributed to the directors or officers of the non- profit.

    Is Tax-Exempt Status Automatically Provided Once You Register?

    No. Although non-profits are formed under state law, you aren't automatically granted tax-exempt status. For that, you must apply for tax-exempt status from the federal government, and depending on the state in which you incorporate, sometimes from your state government as well. Becoming a non-profit corporation is the only way you can achieve tax-exempt status from the IRS.

    What Are the Benefits of Becoming A Non-Profit Corporation?

    Non-profits receive most of the same benefits that C corp status confers, plus:

  • Profits can be retained and used to pay reasonable salaries, and the profits are exempt from corporate taxation.
  • Donors who make contributions can take at least part of their donation as a tax deduction.
  • Members, directors and employees of the non-profit have limited personal liability for the debts, obligations and losses incurred by the business.
  • Certain federal, state, and local income, property and sales tax exemptions are available to non-profit corporations.
  • Non-profits can qualify for employment incentive programs that allow state and federal funds to be used to pay the majority of salaries of certain employees.
  • Lower postal rates for third class bulk mailings apply to non-profits.
  • Certain publications offer less-expensive classified advertising rates to non-profit groups.
  • Stores sometimes provide lower membership rates to employees of non-profits.
  • Retirement funds and qualified retirement plans (like 401k) can be more easily set up if you incorporate as a non-profit.
  • Are There Drawbacks to Incorporating As a Non-Profit Corporation?

    Yes, there are several worth noting.

  • Profits can't be distributed to the non-profit's employees, directors, members, etc.
  • The corporate formalities are greater than other business entity forms and include: periodic filings with state and federal agencies, mandatory corporate meetings, and more rigorous bookkeeping requirements.
  • Application for federal tax exemption must be filed, and in a number of states, the entity must file for exempt status at the state level as well.
  • A non-profit corporation may not participate in political campaigns for or against someone running for public office
  • .

    Want more information about registering a company? Visit our Guide. Check out incorporation fees by each state.

    Tip: Did you know that Delaware and Nevada are top two incorporation states?

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