Nonprofit Entities
A nonprofit can be a corporation, a trust, or an unincorporated association—but a corporation is generally advised. A nonprofit is essentially a regular corporation that has been granted tax-exempt status by the IRS and state tax authorities.
The nonprofit corporation known as a Section 501(c)(3) is associated with organizations that are organized and operated for charitable, educational, scientific, or religious purposes. It is formed by filing articles of incorporation with the state under the state nonprofit or nonstock corporation act, and then applying to the IRS for recognition of its tax-exempt status on Form 1023.
An advantage for a Section 501(c)(3) nonprofit is that donors get a tax deduction and can even contribute appreciated properties to the nonprofit. There are other types of nonprofit organizations recognized by the IRS, such as trade associations and social clubs, but contributions to them are not deductible as charitable donations.
QUICK Tip
Tax-Exempt Status: In some states—notably, California—you must also apply for state exempt status.
The biggest difference between a nonprofit corporation and a regular corporation is that a nonprofit has no authorized stock, and therefore, no shareholders. However, it is run like a for-profit corporation in that it has a board of directors and officers.
Nonprofit corporations also have a need to raise capital for operations and to fulfill their charitable purposes. Since they have no stock to sell, they generally receive their capital from gifts, grants, and donations. When starting a nonprofit, drafting a business plan can be very helpful. This business plan can be presented to government agencies and to other charitable foundations that grant money or funding to nonprofits. It can also be used to show private donors how their donations are being spent.
While nonprofits have no ownership interests to sell to investors, there are instances in which a nonprofit can raise capital through a debt offering. The most typical instance is the use of a church bond for financing construction of a new sanctuary. The bonds, secured by an interest in the building, are retired over time from donations to the church.
Nonprofit corporations have to file initial reports in some states and annual reports in all states. They are also required to file a federal tax return on Form 990, as well as a state nonprofit tax return that many states require. Nonprofit corporations need to observe all of the corporate formality rules of for-profit corporations, including adopting bylaws and keeping corporate minutes. Failure to comply with these rules can result in forfeiture of the corporate charter and personal liability for officers and directors.
