A nonprofit corporation, also known as a 501(c)3 or not-for-profit company, is an organization that does not distribute any of its financial earnings to shareholders or owners/members.
These tax-exempt organizations are generally charities and can receive their income in the form of donations from various sources. They must also pay a yearly fee to the Internal Revenue Service based on their earnings.
Advantages of a Non-profit Corporation
- The major benefit of becoming a nonprofit is that you have a federal tax-exempt status for paying federal income tax.
- This also extends to your employees, volunteers, and board members; these people will not be taxed on the income they receive for their services to the organization. There are some state taxes that might apply, but these can typically be avoided by filing correctly with your state government.
- Your corporation does not have to pay any type of dividend distribution to its shareholders. If you were to operate as a regular company instead, there would likely be pressure on directors or officers of the corporation to declare dividends annually even if doing so meant dropping below the 501(c)3 status because all earnings must eventually return to investors. By filing as an exempt company, you ensure that this does not happen.
- Another benefit is the ability to receive grants from foundations and other agencies. If you are classified as a 501(c)3, then your agency can be called tax-exempt by the donor and will not pay taxes on any donations it receives from them either. This may also mean that they require you to operate as a nonprofit corporation when applying for certain grants or contracts with their foundation or agency.
- Many corporations who file under this status open themselves up to corporate sponsorship and private donations which can help in funding specific projects, equipment purchases, and events your organization runs in the future.
Downfalls of a Nonp-rofit Corporation
- You cannot offer stock options or dividends to your shareholders.
- You cannot offer any type of bonuses or incentives to reward performance or productivity for employees, board members, directors, and volunteers.
- There are strict rules when it comes to paying salaries and wages – you can pay your office manager a salary if that is what they do in their role but if they start performing in specialized roles such as accounting and clerical work then you will need to declare this work as an hourly wage rather than a flat rate because the fact that someone works more hours does not necessarily mean they’re working harder than someone who makes less profit. This means you will have additional payroll taxes added onto these contracts which can become quite expensive over time (it’s also important to note the IRS only allows the president or CEO to make no more than an average of $60,000 based on the total amount of incomethe company makes in a year).
- There are many rules and regulations that come with this status that can be difficult to follow at first – it’s also worth noting that your organization could lose its 501(c)3 status if you do not follow these outlined guidelines.
How much does it cost to file as a Nonprofit organization?
It costs around $1,000 to file online with the IRS – or you can hire a professional who will take care of this for you. Once your 501(c)3 status is approved by the Internal Revenue Service, there are annual fees that typically depend on the amount of income your company takes in annually; this fee must be paid every year before December 31st.
The current rate for small nonprofit organizations (less than $50,000 per year) is $400 and this will increase depending on your earnings up to a maximum of $850 in any one given year.
Types of Non-profit Companies
There are specific types of nonprofit organizations in existence: public charities, private foundations, and membership-based groups.
Public Charities vs. Private Foundations
Both have a number of characteristics that make it clear they are nonprofits; however, there are some differences between these two classifications.
The main differences are outlined below:
- Public charities provide funding for projects or programs that benefit the public at large while private foundations focus on supporting other charitable organizations (rather than direct services). Some examples of public charities would be hospitals or educational institutions; examples of private foundations include Ford Foundation or Carnegie Endowment for International Peace.
- There is no limit to the amount of income you can make as a public charity but you must pay an annual fee to keep your nonprofit status. There is no limit to the amount of money a private foundation can make or distribute but there are extensive rules and regulations surrounding this type of organization.
- A public charity can affiliate with other organizations but a private gives cannot do this as it would hurt its classification as a non-profit entity.
- Public charities must disclose how much they raise each year – if you’re not going to disclose your earnings a public charity is a better option for you. Private foundations need to file an annual tax return form due to their status as a non-profit but they may request that some information remains confidential (for example, the name of an anonymous donor).
A membership organization’s primary purpose is to collect dues from members; if your nonprofit subscribes to this definition, you may qualify for 501(c)4 classification.
501(c)4 Status (Social Welfare Organizations)
This type of organization cannot make political donations or support a candidate running for office; however, they are allowed to lobby on issues that apply to their interests.
This designation includes groups like volunteer fire departments and civic leagues so long as their main concentration is not lobbying.
Non-profit vs. For-Profit Corporation
- Nonprofit companies are legally organized to meet a specific set of goals outlined in their mission statement.
- A for-profit company’s main objective is to make a profit for its shareholders, while a nonprofit organization has the primary goal of serving its community or helping those in need.
For example, Toys “R” Us is a for-profit company whose purpose is to make money and not restrict their earnings – they sell products at the highest price possible with no limits on how much additional revenue they can make from individuals or companies who buy from them.
In contrast, Toys “R” Us would be considered as having 501(c)3 status because they do not advertise too often (including TV commercials), give discounts, don make money off their employees, and do not sell directly to the public (they are a wholesale store).
For-profit companies must pay income tax on anything earned over $500,000 per year.
A company’s status can be determined by checking the internal revenue code that applies to its goals for existence. There are specific types of nonprofit organizations in existence: public charities, private foundations, and membership-based groups.
Who Is a Nonprofit Corporation Right For?
Nonprofit corporations are groups that are legally recognized as being not-for-profit. This means the company’s primary objective isn’t to make a profit for its shareholders, but rather to serve its surrounding community or help those in need.
There are different types of nonprofit corporations depending on how they operate and what their ultimate goal is: public charities, private foundations, and membership organizations.
Deductions for Members
If you are a member of an organization, some may be tax-exempt. This means your membership dues are tax-deductible.
So if you plan on earning around $50,000 or below this year and plan on joining two organizations that offer tax-exemption, make sure any costs related don’t exceed 10% of your income – otherwise, it’ll just look like another deduction for the IRS to deny. You can then turn around and give this money back to the company in order to fully complete their mission!
Nonprofit corporations are legal groups set up to help serve the community.
There are specific types of nonprofit organizations, each with its own advantages regarding how they operate and what their goal is.