In a nutshell, a Nonprofit corporation is an organization formed for the purpose of serving a purpose of public or mutual benefit other than the pursuit or accumulation of profits. It is important to know what a nonprofit corporation is not. A nonprofit is not a way for ordinary businesses -- or people -- to shield assets or avoid paying income tax. It is not an alternative business form for any regular type of business.
Nonprofits are recognized and authorized by Congress (as well as state legislatures), which determined that certain types of enterprises should be free from the burden of having to pay income taxes. It also decreed that society should support and foster many such organizations. In order to accomplish these goals, it established a class of entity now known as a tax exempt corporation, or nonprofit corporations.
There are any number of reasons that an entity might wish to organize as a nonprofit corporation. For some nonprofits it may be to attract donations that are tax deductible to the donors. Many grant making organizations will only grant money to nonprofit corporations. Other groups may form a nonprofit corporation to take advantage of an applicable exemption from paying income taxes as afforded by the Internal Revenue Code.
Incorporation - How it works:
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Non-Profit Corporation FAQs
Forming a nonprofit corporation is much like creating a regular corporation, except that nonprofits have to take the extra steps of applying for tax-exempt status with the IRS and their state tax division. Here is what you need to do:
1)Choose an available business name that meets the requirements of state law.
2)File formal paperwork, usually called articles of incorporation, and pay a small filing fee (typically under $100).
3)Apply for your federal and state tax exemptions.
4)Create corporate bylaws, which set out the operating rules for your nonprofit corporation.
5)Appoint the initial directors. (In some states you must choose your initial directors before you file your articles, because you must list their names in the document.)
6)Hold the first meeting of the board of directors.
7)Obtain licenses and permits that may be required for your corporation.
A nonprofit corporation is created by filing a Articles of Incorporation with the Secretary of State. A "nonprofit corporation" is a corporation in which no part of the income is distributable to members, directors, or officers. A nonprofit corporation may be created for any lawful purpose, which purpose must be stated in its Certificate of Formation.
Benefit Corporations are committed to pursuing a "triple bottom line" that includes people, planet and profits. Any business that forms or elects status as a public benefit corporation will be required to identify one or more specific public benefits to be promoted by the corporation in its certificate of incorporation. The legislation defines "public benefit" as "a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature." In addition to specific public benefits that are identified, the corporation will also be guided by the more general requirement to operate in a responsible and sustainable manner.
As of January 1, 2012, there are two new subtypes of stock corporations in California, a
flexible purpose corporation and a benefit corporation. The new corporation subtypes allow
entrepreneurs and investors to organize stock corporations that can pursue both economic and
social objectives. The new stock corporation subtypes differ from traditional for profit corporations that are organized to pursue profit and nonprofit corporations that must be used solely to promote social benefits.
The flexible purpose corporate designation requires that corporations include some special purpose, which they consider to be beneficial to society, in their Articles of Incorporation and on their share certificates. That special purpose becomes their paramount priority, in most cases superseding the normal requirement that corporations maximize profits. In this, both structures are fairly similar; they both set out on a mission and help protect the business from being sued if that mission results in smaller profits.