How Do Nonprofit Corporations Differ From For-Profit Organizations?

Nonprofit corporations are corporations founded for a charitable purpose. The owner should be comfortable knowing the nonprofit may not earn a major profit. The owner may not earn much money either.

Nonprofits, however, commit to a social mission. Their primary goal is to not make a profit. A nonprofit corporation will reinvest its revenue to achieve its objective instead of distributing this income to its shareholders.

Essentially, the greatest difference between a nonprofit and a for profit organization is a for profit organization is a traditional business. It earns revenue which goes back to the owners.

What is a Nonprofit Corporation?

A nonprofit corporation is a variation of a traditional C Corporation. This business forms to provide public benefit. The purpose of a nonprofit corporation may be to further a particular social cause or advocate for a specific point of view.

Generally, many business owners organize as a nonprofit corporation if their mission serves educational, scientific, religious, or charitable needs. Forming a nonprofit corporation allows the organization to receive liability protection. This is key for its officers and directors.

Starting a Nonprofit Corporation

Starting a nonprofit corporation is a bit like starting a standard corporation or LLC. However, there are a few key differences.

1. Establish Your Mission

Once you know you want to form a nonprofit corporation, you must determine its charitable mission and purpose.

Your nonprofit corporation needs to be organized for an exempt purpose. This is critical to remain in compliance with IRS regulations. You can establish your mission by drafting a mission statement. This statement answers questions regarding the goals you want to accomplish, whom you plan to help, and the vision of your nonprofit organization. Your mission will be taken into consideration by the IRS and state tax agencies when deciding if your business will achieve a nonprofit status. Make sure the mission statement you come up with is one where the nonprofit may be able to fulfill its purpose.

2. File for Tax Exempt Status

Filing for nonprofit tax-exempt status is done with the state and federal governments. The most popular exemption type is 501(c)(3). This status exempts eligible corporations from having to pay federal and state taxes because the corporation is pursuing a nonprofit mission.

To file for tax exempt status, nonprofit corporations must complete and file Form 1023 and pay a filing fee. Smaller nonprofit organizations may be eligible to apply using Form 1023-EZ. Once the agency has received the application, they will review it. Then they will determine whether to grant the nonprofit corporation tax exempt status.

In addition, your nonprofit’s state of incorporation may require charitable solicitations registration. Check in with your local Secretary of State to be certain.

3. Choose a Business Name

Pick a name for your nonprofit corporation. It needs to be unique, original, and meaningful.

Conduct a name search prior to filing for trademark registration. If the name is available and is not pending registration, you may file for a trademark at the federal level.

4. Designate a Registered Agent

A registered agent acts as the point of contact between your nonprofit corporation and the state. This individual, or third-party organization, receives legal and official business documents An RA delivers them to the owner in a timely manner.

5. Incorporate

Register your business by preparing articles of incorporations with the state where your business will operate. Completely fill out this document. Then pay the filing fee to the appropriate point of contact.

6. Create Corporate Bylaws

Corporate bylaws allow an organization to maintain consistency in its operations. Bylaws are a detailed set of rules agreed upon and adopted by the board of directors after forming a nonprofit corporation. You’ll find details about how directors are elected, meetings are organized, annual meetings, and the duties of each member of management inside corporate bylaws.

7. Obtain an EIN

An EIN is an employer identification number. The IRS issues this tax ID to small businesses. It identifies your business for tax purposes. You may also use an EIN to hire employees and open a business bank account.

8. Draft a Business Plan

This may be written in a traditional or lean format. A business plan acts as the foundation for the nonprofit, covering its goals and timelines for reaching each one.

9. Build a Board of Directors

This is a legal requirement.

The names, and roles, of your board members must also be required on your nonprofit’s articles of incorporation. You may decide between having a working board, where the board members do the work in the organization in lieu of a paid staff. You may also appoint a governing board to oversee operations while a paid staff performs daily duties.

Considerations After Launch

Once you incorporate your nonprofit corporation, you’ll still need to take care of additional housekeeping for the organization. This includes:

  • Setting up a website and social media presence.
  • Determining if you will have a physical office location.
  • Establishing a fundraising plan and getting familiar with fundraising platforms.
  • Networking with other nonprofit organizations, sponsors, and donors.

Additionally, it is critical your nonprofit corporation remains in good standing. Update corporate and financial records, along with minutes from meetings and corporate bylaws. The IRS will require you to file Form 990 on an annual basis. Pay taxes, update applicable licenses, and secure all data from donors and sponsors.

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