Definition
A Nonprofit Corporation is a type of legal entity organized and operated for purposes other than generating profit. Instead of distributing income to members, directors, or officers, it retains what it earns and uses it to achieve its organizational goals. Nonprofit corporations can be established for various aims, including charitable, educational, scientific, religious, and literary purposes.
In the United States, nonprofit corporations often apply for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. This designation exempts them from federal income tax on activities related to their mission and allows them to receive tax-deductible donations from the public.
Examples
- Charitable Organizations: Groups like the American Red Cross, which provides disaster relief and emergency assistance.
- Educational Institutions: Schools and universities like Harvard University that aim to provide education and advancement of knowledge.
- Religious Organizations: Churches, synagogues, and other religious bodies that provide spiritual guidance and community services.
- Scientific Research Institutes: Organizations like The Scripps Research Institute dedicated to advancing scientific discovery.
- Literary and Arts Foundations: Organizations like the National Endowment for the Arts that fund and support artistic endeavors.
Frequently Asked Questions
What differentiates a nonprofit corporation from a for-profit corporation?
A nonprofit corporation does not distribute its surplus funds to owners or shareholders; instead, it reinvests them into its mission or projects.
How does a nonprofit corporation obtain tax-exempt status?
To obtain tax-exempt status, a nonprofit corporation must apply to the IRS using Form 1023 or Form 1024, depending on the type of tax exemption sought (typically 501(c)(3) for charitable organizations).
Can a nonprofit corporation engage in political activities?
While nonprofit corporations can engage in some lobbying activities, they are prohibited from engaging in political campaign activities to support or oppose political candidates.
What happens to the assets of a nonprofit corporation if it dissolves?
Upon dissolution, the remaining assets of the nonprofit corporation must be distributed to another tax-exempt organization, or as specified by state laws and the nonprofit’s governing documents.
Are board members of a nonprofit corporation paid?
In most nonprofit corporations, board members serve on a voluntary basis, though they can receive reimbursement for expenses. Some nonprofits may compensate board members, but this is less common and subject to scrutiny.
- Not-For-Profit: An organization that does not earn profits for its owners. Nonprofit and not-for-profit are often used interchangeably, but legally, they can differ based on the jurisdiction and specific uses.
- 501(c)(3): A section of the U.S. Internal Revenue Code that provides tax exemption for organizations operated exclusively for religious, charitable, scientific, or educational purposes.
- Foundation: A type of nonprofit organization that typically supports philanthropic activities through grants and donations.
- Public Charity: A non-profit organization that receives a substantial portion of its revenue from the general public or the government and engages in direct service activities.
- Private Foundation: A non-profit organization typically funded by a single donor or a small group of donors, and it usually makes grants to other organizations rather than operating its own programs.
References and Resources
- IRS Tax Exempt Organization Search
- National Council of Nonprofits
- GuideStar
Suggested Books for Further Studies
- “Nonprofit Management: Principles and Practice” by Michael J. Worth
- “The Nonprofit Board Answer Book: A Practical Guide for Board Members and Chief Executives” by BoardSource
- “Managing Nonprofit Organizations: Updated Twenty-First-Century Global Edition” by Mary Tschirhart and Wolfgang Bielefeld
- “The End of Fundraising: Raise More Money by Selling Your Impact” by Jason Saul
Fundamentals of Nonprofit Corporation: Nonprofit Management Basics Quiz
### What is the primary purpose of a nonprofit corporation?
- [x] To serve a public or mutual benefit rather than to pursue profits.
- [ ] To generate profits for its shareholders.
- [ ] To engage exclusively in political campaign activities.
- [ ] To create a platform for for-profit partnerships.
> **Explanation:** The primary purpose of a nonprofit corporation is to serve a public or mutual benefit rather than generating profits for its owners, members, or shareholders.
### Which section of the Internal Revenue Code provides for tax-exempt status of charitable organizations?
- [ ] 401(k)
- [x] 501(c)(3)
- [ ] 123(a)(1)
- [ ] 400(b)(2)
> **Explanation:** Section 501(c)(3) of the Internal Revenue Code provides for tax-exempt status for organizations operated exclusively for religious, charitable, scientific, or educational purposes.
### Can nonprofit corporations distribute profits to their board members?
- [ ] Yes, as long as it is in the interest of the organization.
- [x] No, profits must be reinvested into the organization.
- [ ] Yes, they can distribute profits equally among board members.
- [ ] Yes, but only if the organization is profitable.
> **Explanation:** Nonprofit corporations must reinvest any profits back into the organization and cannot distribute them to board members, officers, or shareholders.
### Which document typically governs the rules for the operation of a nonprofit corporation?
- [ ] Mortgage Agreement
- [ ] Insurance Policy
- [ ] Commercial Lease
- [x] Bylaws
> **Explanation:** The bylaws of a nonprofit corporation typically outline the rules and procedures for its operation, including director responsibilities, meeting protocols, and procedures for voting.
### How often must a nonprofit organization file Form 990 with the IRS?
- [ ] Monthly
- [ ] Bi-annually
- [x] Annually
- [ ] Once every five years
> **Explanation:** A nonprofit organization must file Form 990 with the IRS annually to report finances, activities, governance, and to remain transparent and compliant with tax regulations.
### What is one potential disadvantage of starting a nonprofit corporation?
- [ ] Lack of inherent mission focus
- [x] Limited access to capital since profit cannot be distributed to investors
- [ ] Excessive profitability
- [ ] Simplified regulatory compliance
> **Explanation:** One potential disadvantage is limited access to capital since nonprofit corporations cannot distribute profits to investors, relying mostly on donations and grants, which can challenge funding.
### What must happen to the assets of a dissolving nonprofit corporation?
- [ ] They can be distributed to the shareholders.
- [ ] They should be donated to a for-profit entity.
- [ ] They can be auctioned off to the highest bidder.
- [x] They must be distributed to another nonprofit organization or used in accordance with state laws and the corporation’s charter.
> **Explanation:** When a nonprofit corporation dissolves, its remaining assets typically must be distributed to another tax-exempt nonprofit organization, in line with the mission and legal requirements.
### What distinguishes a private foundation from a public charity?
- [x] A private foundation is usually funded by a single source, while a public charity operates significant public fundraising.
- [ ] A private foundation operates public programs, while a public charity provides grants to other nonprofits.
- [ ] A public charity focuses on profit generation, unlike a private foundation.
- [ ] Private foundations have no tax-exempt status.
> **Explanation:** A private foundation is usually funded by a single philanthropist, family, or corporation and primarily provides grants to other nonprofits, whereas a public charity conducts direct service or public fundraising activities.
### Which activity is generally prohibited for 501(c)(3) organizations?
- [ ] Documenting financial transactions
- [ ] Fundraising for operational costs
- [ ] Hosting educational programs
- [x] Participating in political campaign activities
> **Explanation:** 501(c)(3) organizations are prohibited from engaging in political campaign activities that support or oppose candidates, which would violate their tax-exempt status.
### Why might an organization choose not to incorporate as a nonprofit?
- [x] The incorporation and compliance processes can be complex and expensive.
- [ ] They prefer working in the private sector exclusively.
- [ ] To distribute profits among its employees.
- [ ] To attract venture capital investment.
> **Explanation:** Some organizations might avoid incorporation as a nonprofit due to the complex and sometimes costly processes involved in establishing and maintaining compliance, potentially opting for alternate structures.
Thank you for diving into the world of nonprofit corporations and trying your hand at our nonprofit management quiz. Continue learning and aiming for success in your nonprofit endeavors!
