Nonprofit corporations are a common business structure that brings people who share the same mission and philosophy together. They are created with the purpose of helping people and animals and contributing to a better world. Our article will answer the question of “what is a nonprofit corporation” in great detail, providing you with a definition and an overview of some of the most common types of nonprofit corporations.
While they have a noble cause, nonprofit corporations aren’t without their disadvantages. In addition to explaining the ins and outs of the structure of nonprofit corporations, we have also included sections where we go over some of the most important advantages and disadvantages of nonprofit corporations. By doing so, we hope to make it much easier for you to conclude whether this business structure is right for you. At the end of our article, you’ll also find a detailed FAQ section.
With that out of the way, it’s time to define what is a nonprofit corporation.
What Is a Nonprofit Corporation?
The main difference between a nonprofit corporation and other types of corporations is that the former don’t have shareholders/owners and don’t issue stock or pay any dividends. While the employees and directors of the nonprofit corporation are still getting paid, as the name suggests, the main goal of a nonprofit corporation isn’t to make a profit. Instead, all the profits usually go to expanding and growing the corporation or furthering a social cause.
Types of Nonprofit Corporations
The most common type of nonprofit corporation is charity. However, there can also be various other types of corporations that fall under education, literature, science, animals, children, and other categories. All in all, there are four main types of nonprofit corporations: charities, foundations, Social Advocacy Organizations, and trade and professional organizations.
Charities are designed to help provide funding and services to the public from funding obtained by donations, either private or by fundraising events. Some examples of charities include the Red Cross and food banks.
Social Advocacy Organizations have social justice as the main focus. This includes civil rights, human rights, and individual rights. The goal of these organizations is to promote social change and inclusion, and contribute to a more equal society.
Foundations are similar to charities – they’re obliged to donate part of their income to other organizations every year. The difference between charities and foundations is that foundations are funded by for-profit organizations.
Trade/professional organizations are membership organizations whose purpose is to serve the members who are usually brought together by a special interest or activity.
The Structure of Nonprofit Corporations
When it comes to the structure, there are two main types of nonprofit corporations: those governed by their members and those governed by a board of directors.
If the corporation contains members, they can have control over the board of directors and participate in the decision-making process. This type of structure is ideal for those who want a democratic approach. The other type of corporation is a board-governed corporation, where there are no members but a board of directors who are responsible for making all the decisions. Since there are no members, the board of directors are in charge of choosing who joins the board.
Advantages of Forming a Nonprofit Corporation
Now that you’re familiar with the definition and structure of nonprofit corporations, let’s look at some of the most common benefits you can experience if you choose this type of structure.
This one goes without saying, but creating a corporation whose purpose is to help a social cause or movement is incredibly rewarding. Your work will make a positive difference in the world, which helps keep you motivated and inspired. While they’re not designed to create profit, many members/directors of nonprofit corporations find that the satisfaction they get from making a change and leaving their clients happy far outweighs the financial benefits that might come with other types of corporations.
Even though the main goal of nonprofit corporations isn’t to make a profit, there are still some financial benefits its members can enjoy. For instance, nonprofit corporations are often given a discount for any purchases that need to be made or services that need to be paid. Additionally, they’re incredibly attractive to potential donors who are dedicated to making a difference with their support.
Since nonprofit corporations are incorporated, members can enjoy complete protection from personal liability. This means that in case the corporation gets a lawsuit, a claim, or undergoes some kind of financial hardship, the members’ personal assets, like their cars and real estate, won’t be up for grabs. This is an incredibly important feature for a nonprofit corporation due to the nature of the corporation and the fact that members are expected to cooperate with the public.
Access to Various Grants
Since nonprofit corporations are designed to help charitable causes, they’re more eligible for funding as well as public and private grants than other types of corporations. With access to more funds, there are bigger chances of growing the corporation and expanding the causes they work with since you don’t have to pay the money back, only invest it into the growth of the corporation. Not to mention, there are many types of grants that are only available to nonprofit corporations.
More Employee Benefits
Nonprofit corporations offer many benefits to their employees which aren’t reserved for corporations that aren’t incorporated. Some of these benefits include providing better pensions and health insurance.
Providing these types of benefits to your employees is a great way to compensate for the lack of profit. The employees will know that their financial gain will be limited while working for a nonprofit corporation beforehand, but it’s always nice to provide a non-financial reward to acknowledge their hard work.
Nonprofit corporations have much better longevity than corporations that aren’t incorporated. Even in the case of a sudden death of a member or a director, the corporation will continue to exist after the ownership is given to its successor.
Even if the reason for ownership transfer is something else apart from death, transferring the ownership will be a much easier and faster process than with some other types of corporations, which is always a plus.
Nonprofit corporations typically have a formal structure that entails giving their employees formal job descriptions and allows the members/directors to make all the decisions. This gives the impression of being professional and put-together, making them more appealing to potential investors and co-operators.
More Committed and Motivated Employees
Those who decide to work for a nonprofit corporation aren’t solely motivated by profit. Instead, they have a personal attachment and interest tied to the cause, making them more likely to stay motivated and committed even when the times are rough.
Having self-motivated employees who share the mission of those in charge does wonders for a corporation’s success.
Disadvantages of Forming a Nonprofit Corporation
Just like with any other business structure, there are some disadvantages to forming a nonprofit corporation that you should be aware of to make an informed decision about whether this type of corporation is right for you. Here are the most pressing cons associated with nonprofit corporations.
Nonprofit corporations experience more social pressure compared to corporations that don’t have a charitable nature. Not everyone will share the goals and mission of the employees and members, and the fragile and personal nature of nonprofit corporations makes them more likely to receive backlash. Those working for nonprofit corporations often feel an enormous amount of pressure, since even the slightest mistake could have consequences for the cause.
Employees and members of nonprofit corporations need to be equipped to deal with any potential problems that might arise and have the ability to work extremely well under pressure.
There’s also more paperwork associated with nonprofit corporations. You’ll have to keep track of expenses, profits, and provide detailed records, in addition to the annual filings. Needless to say, this is quite time-consuming, so keep it in mind when deciding whether to form a nonprofit corporation.
Even though the members and directors of a nonprofit corporation share a noble mission and philosophy, due to the structure of the corporation – having little personal control and having to make joint decisions – the chances of disagreements are quite high. The conflicts can be regarding whom to hire and appoint to the board of directors, how to handle problems that might arise, and the future prospects of the corporation.
Regardless of the nature of the disagreement, with proper communication, these disagreements can be gracefully handled.
Longer Application Process
The application required to get appointed a 501(c)(3) status of the Internal Revenue Code can take quite a long time to get approved. Sometimes, it can take more than three months to get approved, so make sure you factor this in when you’re planning the ins and outs of how you’ll start your corporation.
Directors Don’t Get a Cut of the Profits
While many directors value the mission of the nonprofit corporation above the profits, it needs to be acknowledged that, unlike other types of corporations, directors don’t get a share of the profits. Instead, every profit that’s made is directly invested into furthering the corporation’s cause and its growth. Keeping any profits on the part of the directors is forbidden and might result in a variety of penalties that could taint your professional reputation.
If you’re interested in gaining profit from your work, you’ll be much better suited with a for-profit corporation than a nonprofit corporation.
How to Form a Nonprofit Corporation
Since by now you’re aware of some of the advantages and disadvantages of forming a nonprofit corporation, it’s time to share with you some of the steps required to form this type of corporation in case you decide that this is your preferred business structure.
Decide on a Business Name
Just like with any other business, with nonprofit corporations, you’ll need to decide on a name and register before you proceed with the formation process. The business name has to be available and some states have restrictions as to what words can appear in your name, so make sure you do your research beforehand to avoid not getting approved.
File Articles of Corporation
The second step to forming a nonprofit corporation is filing the articles of corporation, which are essentially all the paperwork and legal documents required of you to start your business. Some of the information you have to include in these articles is the name and location of your business, why you’re creating your business, and the cause you’ll be contributing to.
Apply for Tax Exemptions
As we already discussed, nonprofit corporations are eligible for certain tax exemptions, so the next step includes applying for those.
This step includes applying for an EIN (Employer Identification Number), filing Form 1023 with the IRS, and applying for tax-exempt status under Sec. 501(c)(3). Make sure you allow yourself enough time for all these steps since the process can be quite time-consuming. You’ll also need to pay the necessary filing fees, which usually cost a couple of hundred dollars.
Create Corporate Bylaws
Another crucial step in forming a nonprofit corporation is creating the corporate bylaws. These bylaws state how your corporation will be managed and what the responsibilities of the members are.
Appoint a Board of Directors
The next step is to choose who will be a part of your board of directors. You’ll need to have a board of directors to complete the next step, which is holding the first meeting of a board of directors. However, some states require you to appoint a board of directors before you file articles of corporation, so make sure you check with the state.
Get a Hold of Licences and Permissions
Last but not least, before your business starts officially operating, you’ll need to get the necessary licenses and permissions to ensure that the legal side of your business is taken care of.
The extent of the licences required depends on the type of nonprofit corporation you want to create.
Is Creating a Nonprofit Right for Me?
Nonprofit corporations are an amazing option for those who want to contribute to a better world and help a specific cause. If you’re extremely passionate about a certain cause, such as reducing homelessness and hunger, nonprofit corporations might be right for you.
What Is the Difference Between a Nonprofit and a Not-for-Profit?
Those who are looking to start a nonprofit corporation might be confused by the term not-for-profit. The main difference between a nonprofit and a not-for-profit organization is that a nonprofit organization is a separate legal entity with special taxation, whereas a not-for-profit organization isn’t a separate legal entity. Additionally, not-for-profit organizations don’t qualify for a tax-exempt status.
That concludes our article on nonprofit corporations and their advantages and disadvantages! We hope we managed to answer the question of “what is a nonprofit corporation?” and that by now, you’re confident to make a decision regarding whether you want to form a nonprofit corporation.
The first thing to decide is what kind of nonprofit corporation you want to form. The four main types are charities, foundations, Social Advocacy Organizations, and trade/professional organizations. When you make a decision, you’ll need to cover a couple more steps for your nonprofit corporation to be formed. Some of these steps include filing articles of incorporation, appointing a board of directors, and creating company bylaws.