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Nonprofit Corporations – What, Why, and How?

Updated: Nov 11, 2023

What is a nonprofit corporation?


A nonprofit corporation is a corporation similar to for-profit corporations. They have a board of directors, they have bylaws, and they hold regular meetings. They are distinct in that they are organized for a particular social, public, religious, or other general benefit.


They are also distinct in that they can qualify for tax exempt status. The policy behind tax exemption is that if a corporation is working towards the benefit of society or a community as a whole, then it is fulfilling the role that government spending (that is, those taxes) is meant to do.


Why form a nonprofit corporation?


The obvious reason is that many people feel compelled to one cause or another. They organize in order to further that cause, and they form a nonprofit corporation to obtain tax exempt status.


For example, perhaps you have a friend affected with a rare form of cancer, so you form a nonprofit dedicated to donating funds for research of that type of cancer. Or perhaps you're an animal lover, and you decide to operate a dog shelter.


There are nonprofits for causes you like, causes you oppose, causes you care about, causes you had never heard of before, etc. As long as the nonprofit corporation is formed pursuant to its state's statutes, and it is qualified by the IRS, it will be exempt from taxes.


An added benefit is that, as a corporation, nonprofit corporations also have limited liability. But this means observing all formalities are required to avoid veil piercing.


How do you form a nonprofit corporation?


In a basic sense, it's formed the same way as any other corporation (though there is no need for shareholder meetings because there are no shareholders).


However, you will also need to apply for tax exempt status, both from the IRS and state agencies. In Texas, this is the Comptroller of Public Accounts. In California, this is the Franchise Tax Board. Some states require registry with the Attorney General (in California, this is with the Registry of Charitable Trusts; only specific types of Texas nonprofits have to register with the Attorney General).


And in some states (like California), you will need to select a particular type of nonprofit corporation before you form it.


Are there different kinds of nonprofit corporations?


It depends on your state, but yes, in some states.



Meanwhile, Texas only has the nonprofit corporation.


Are there other kinds of nonprofit entities besides nonprofit corporations?


Again, this depends on state law. But California, Texas, and the federal government allow for unincorporated nonprofits to seek tax exempt status. California and Texas also allow for the formation of nonprofit LLCs.


Conclusion


Nonprofit corporations are similar to for-profit corporations. However, they have some peculiarities and added requirements. Familiarize yourself with your state's nonprofit rules. Many states have FAQs and explainers that can be helpful at a basic level.

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