Non-profit corporations carry out charitable, educational, religious, literary, or scientific purposes. Non-profits might operate similarly to a corporation, but they don't pay taxes on profits that help them carry out their charitable objectives. This is one of the primary benefits of non-profit corporations.
How Does a Non-profit Work?
Since a non-profit corporation doesn't pay federal or state income taxes, it must file taxes in a specific manner. The IRS and state tax agencies believe that the organization benefits the public more than the tax. This public benefit provides them a special tax-exempt status.
When forming a non-profit, it is done under Internal Revenue Code Section 501(c) exemptions. There are 29 different types of non-profit organizations that are exempt from federal taxes. Some are more commonly used than others. For example, there are 1.5 million 501(c) organizations in the United States, and 70% are 501(c)(3) organizations.
What are the Different Types of Non-profits?
There are a few different types of non-profits that you can create.
501(c)(3)
501(c)(3) non-profits are the most commonly chosen variation. They are categorized by missions that include:
- Charitable
- Educational
- Religious
- Literary
- Scientific
- National or international amateur sports
- Groups testing for public safety
- Prevention of cruelty to children or animals
One well-known example of a 501(c)(3) non-profit is a charitable hospital or the Red Cross.
In order to create a 501(c)(3) non-profit, you must begin by creating a corporation. After, you can apply for the status of a 501(c)(3) non-profit.
501(c)(4) Non-profits
501(c)(4) non-profits are often confused with 501(c)(3) non-profits. Despite this, they are different. These organizations are those that nurture educational, recreational, charitable, and community welfare missions. Examples of 501(c)(4) organizations include:
- Social welfare organizations
- Local associations of employees
- Civic leagues.
One example of a 501(c)(4) non-profit would be a rotary club or a volunteer fire station.
501(c)(5) Non-profits
When it comes to labor or agricultural unions, they are often classified as 501(c)(5) organizations. These unions have the purpose of bettering the lives of laborers and farmers. Therefore, they are given tax-exempt status. The UAW is a well-known 501(c)(5) non-profit.
501(c)(6) Non-Profits
Most 501(c) non-profits do not make profits, but a 501(c)(6) can turn a profit and continue to hold on to its tax-exempt status. In order to qualify as a 501(c)(6) non-profit, it must be an association or a league united for one purpose. This typically includes uniting a group of people that wish to affect change. One well-known example of a 501(c)(6) non-profit is the National Football League, which has come with a lot of controversies.
501(c)(7) Non-Profits
Fraternal societies and associations or other social clubs can qualify for a 501(c)(7) non-profit status. They are required to operate with a chapter system and prove that they offer benefits to members. This might include discounted insurance or travel benefits, such as AAA or the Knights of Columbus.
What are the Advantages and Disadvantages of a Non-Profit Corporation?
It’s essential that business owners know the advantages and disadvantages of a non-profit corporation before starting one.
Advantages of a Non-Profit
- The mission is clear and typically achievable
- Exempt from corporate taxes
- Allowed to receive public donations
- Tax laws encourage donations to non-profit corporations
- Legal protection from personal liability
- Receive discounts on postage and advertising rates
- Benefits become available for employees (health and retirement plans)
Disadvantages of a Non-Profit
- It costs money and time.
- Must keep good records to remain in compliance.
- Paperwork is required to be filed yearly.
- Under greater public scrutiny due to being tax-exempt.
How to Create a Non-Profit Corporation
Creating a non-profit is a great way to give back to your community. Here are 4 steps to create a non-profit corporation in Delaware.
File Articles on incorporation
Similar to that of a regular corporation, you will need to file documents that form your corporation. This includes the correct paperwork, as well as paying the necessary state filing fees. The paperwork and fees vary by state, but in Delaware, the cost is $105.
Apply for tax exemption
After the creation of your corporation, you will need to apply for non-profit status. To apply, file an Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.
Write Corporate Bylaws
The bylaws are different from articles of incorporation because they remain in the institution and help to govern it. Essentially the bylaws are a set of rules. They should describe the purpose and layout of all the rules. This may include how directors are elected when the meetings are held and how decisions can be made. It may also involve the duties of everyone involved and the organizational structure.
Create a Board of Directors
In order to form bylaws or begin practicing, you will need a board of directors who govern the non-profit. These may include a president, treasurer, and secretary. They will be able to elect the officers, form the bylaws, and take care of important tasks such as creating a bank account and documenting tax exemptions. Board meetings should be held at least once per year.
Who is a Non-Profit Corporation Best For?
Non-profits work to change the world through corporate status. They are established for specific non-commercial purposes. This means if your business has a religious, educational, or charitable purpose, it might be right for you, such as:
- School
- Hospital
- Museum
- Church
- Food Bank
- Homeless Shelter
- Worker's union
Regardless of the organization you form, you must comply with strict requirements. You need to because of the federal tax exemption that goes along with a non-profit corporation.