Nonprofit Corporation: Overview

A nonprofit corporation is virtually the same as a traditional for-profit corporation except a nonprofit is not required to pay taxes on its profits. It's important to understand that only profits related to the nonprofit's purpose and regular services are not subject to taxes. If the nonprofit corporation makes profits performing services that don't relate to its stated purpose, these profits must have taxes paid on them. Other than the tax difference, nonprofit corporations must follow corporate formalities just like for-profit corporations. A nonprofit corporation also provides some personal liability protection to directors, officers, and members.

Maintaining Tax-Exempt Status

In order to maintain its tax-exempt status, a nonprofit organization must abide by certain rules. Nonprofits are not allowed to receive "substantial" profits from activities that don't relate to the nonprofit's purpose. A nonprofit is not allowed to distribute its profits to officers, directors, or members. In addition to the restrictions involving profits, nonprofits have limitations on their non-business activities. For example, a nonprofit is not permitted to make a monetary contribution to any political campaigns. In addition, nonprofits can only be involved in a limited amount of political lobbying.

Advantages and Disadvantages of Nonprofit Organizations

The main advantage of a nonprofit organization is its tax-exempt status, allowing more of its resources to be available for achieving the nonprofit's goals. Another advantage to nonprofits is that they can qualify for government funding or special grants. Nonprofits can also sometimes receive special rate for certain services. Finally, if you are interested in obtaining donations or contributions from people, nonprofit status allows donors to deduct such contributions from their federal and state income tax returns.

There are, of course, some disadvantages to starting and running a nonprofit organization. As mentioned above, in order to maintain its nonprofit and tax-exempt status, profits cannot be divided among members. Generally, a nonprofit also has less flexibility and potential for personal gain than a for-profit organization. Also, in the event that the directors choose to terminate the nonprofit organization, the nonprofit must pay off all remaining debts and then distribute any remaining assets to another nonprofit corporation.

Hiring an Attorney

Starting or being involved in a nonprofit organization can be a good way to be involved in helping people. If you are interested in finding out more about nonprofit organizations, or are interested in starting one, you may want to contact an experienced business and commercial attorney in your area.