A nonprofit corporation is a corporation that is formed for purposes other than generating profit. Nonprofit corporations are formed pursuant to different state law than standard for-profit corporations. There are many types of nonprofits, such as churches or church associations, charities, schools, medical providers, legal aid societies, volunteer services organizations, professional associations, research institutes, museums, and in some cases sports associations.
The most common type of nonprofit is the 501(c)(3) nonprofit, which are organized under Section 501(c)(3) of the Internal Revenue Code. These nonprofits are created for some religious, charitable, educational, literary, or scientific purpose allowed by this section of the code. As mentioned above, nonprofits can be organized for other purposes. For example, Chambers of Commerce are 501(c)(6) nonprofits and cooperative hospital service organizations are 501(e) nonprofits.
The first step in creating a nonprofit corporation is filing the nonprofit articles of incorporation with the appropriate state agency, often the Secretary of State, and paying the required state filing fees. The articles of incorporation for a nonprofit must typically include detailed information regarding the business purpose so the state can ensure the proposed activities of the corporation will comply with the state’s nonprofit statutes.
Nonprofits do not automatically become tax exempt upon formation with the state. In order to become a tax-exempt nonprofit corporation, the corporation must file for both federal and state tax-exempt status. To apply for federal tax-exempt status, Form 1023 must be completed and submitted to the IRS. This is a very detailed process that can take months to complete, and often four to six months to obtain approval from the IRS. Additionally, the IRS charges a fee when Form 1023 is filed. The fee is based on the nonprofit corporation’s gross receipts in the first five years of existence. To apply for tax-exempt status at the state level, contact your state’s department of taxation for information on its process.
As with standard corporations, nonprofits must also comply with ongoing requirements imposed by the states, and ongoing formalities required of the corporate structure. Many states require nonprofits to complete annual reports or semi-annual reports and to pay a report filing fee. These reports allow the states to keep updated information on the nonprofit. Nonprofits are also required to hold and properly document annual meetings of directors and members. Similar to for-profit corporations, nonprofits offer limited liability to the directors and members, meaning that the personal assets of these parties typically cannot be used to satisfy the debts and liabilities of the nonprofit. However, like for-profit corporations, nonprofits must follow the necessary formalities to demonstrate that they are acting like a corporation and should continue to receive the benefits the nonprofit corporation presents.
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