A nonprofit company is a type of business entity whose main purpose is not to make money. Sometimes, these companies are charities or goal-oriented organizations; other times, they are institutions such as schools or religious organizations.
There are nonprofit corporations/companies that are, indeed, profitable. Still, the difference between this type and other business entities is that if you’re registered as a nonprofit, you must put all of the earnings back into the organization and its mission.
- Making money/profit is not the main purpose of every business, especially those looking to serve the greater good.
- There are a lot of companies whose work is mission-driven, and they are oriented to make a difference rather than make a profit.
- By forming a nonprofit company, you gain certain tax benefits and advantages upon establishment; however, not all groups and organizations can apply and gain nonprofit approval for tax-exempt status.
- Forming a nonprofit company/organization is not a good fit for every organization, so knowing what this type of business entity means is good.
Nonprofit vs. For-Profit Bussiness Entity
The name “nonprofit company” can be a bit misleading. As we mentioned above, nonprofit corporations often make a lot of money—often, more than their operating expenses actually cost, meaning that they’re profitable from a profit-and-loss standpoint.
But, for nonprofit companies/corporations, it’s not a question of whether or not you’re making a profit; rather, it’s how the organization is set up, its purpose, and who is involved.
Characteristics of Nonprofit Business Entity
- Does not seek to make money from its operations
- Money earned is invested back into the company or the mission.
- The company is mission-driven, not profit-driven
- Any money not used to address debts must go into another nonprofit if the organization fails.
- Owned by the public
- Accountable to the federal government
- Can raise money from the general public, corporations, foundations, or individuals who do not expect a return
Characteristics of For-Profit Corporations
- Seeks to make money from the company’s goods or services
- Shareholders, employees, and other stakeholders profit from the company’s activities.
- Controlled by private interests
- Profit is generally the measure of success.
- Can raise money from private investors who expect a return on investment
What Kind of Businesses Form a Nonprofit Company/Business Entity?
In general, the businesses that form a nonprofit corporation are charitable, mission-driven, or have a greater purpose beyond serving the interests of shareholders.
The common types of organizations that operate as a nonprofit companies are:
- Animal shelters and rescues
- Environmental groups
- Human rights and social advocacy groups
- Educational institutions
- Religious institutions
- Trade or professional groups
- Federal credit unions
- Scientific and research groups
- Veterans’ groups
This is not an exhaustive list—there are other, very specific types of organizations that qualify, too—but you should be able to get a sense of what qualifies based on these categories.
Examples of Nonprofit Organizations
There are a lot of organizations in the U.S, well known, that are incorporated as nonprofit business entities or companies.
The most famous examples of nonprofit organizations are:
- American Red Cross
- New York Public Library
- St. Jude Children’s Research Hospital
- National Geographic
- Doctors Without Borders
- Boy Scouts of America National Council
- Ohio State University
- Christian Broadcasting Network
- Habitat for Humanity
- United Way
- Society for Human Resource Management
…and (literally) millions more.
An organization’s nonprofit and tax-exempt status is available as public information, so if you’re curious as to whether a certain business is a nonprofit corporation, you will likely be able to find out.
Benefits of Forming a Nonprofit Business Entity?
Now that you’re hopefully clear on what a nonprofit company is, you’ll find that there are many benefits to forming this business structure.
Tax Advantages of Nonprofit Corporations
The main advantage of forming a nonprofit company is tax advantages. Nonprofits are often partially or entirely exempt from federal, state, and local taxes.
You’ll also potentially be able to receive credits and deductions. If you sell something, you may also be exempt from things like sales tax and not have to pay property taxes.
In order to see what tax advantages your nonprofit may enjoy in your area, you’ll want to check your local-area laws in order to be aware of what you can apply in your business.
Other Advantages of Nonprofit Businesses
Here are a few more advantages you’ll find if you incorporate as a nonprofit corporation/company:
- The ability to apply for and receive certain grants restricted to nonprofits
- Legal protection for members (only the assets are subject to legal action in the case of a lawsuit, not the proprietors of the organization—much like an LLC creates separation between personal and business assets and identity)
- Discounts on essentials such as postage, advertising, and more
- Credibility for your organization and its goals
Nonprofit Corporation Restrictions
There are also a few restrictions worth noting if you pursue this path. Among them are:
- Restrictions against lobbying
- Limit against functions in order to qualify for nonprofit activities
- Unable to collect profits from activities
These regulations sometimes change, so you’ll want to review them before you start your business, especially so you don’t jeopardize your nonprofit status.
Types of Nonprofit Corporations
About 30 different types of nonprofit classifications are noted, all separately by the IRS. Your classification (and any restrictions or benefits associated with this status) will depend on the type of function that your organization carries out.
Major types of non-profit business structures are:
- 501(c)(3): This is probably the type you’ve heard the most about because most nonprofits fall under this classification. This is for charities. All 501(3)(c) income and donations are tax-exempt.
- 501(c)(4): These types of organizations are social advocacy groups.
- 501(d): This is for religious organizations.
- 501(k): These include childcare organizations.
There are hyper-specific types of nonprofit corporation designations—including farm and crop organizations, veterans’ organizations, and more—so you’ll need to see where your company/business fall.
How to Form a Non-Profit Company
If you find that forming a non-profit business entity is correct for your type of company, you need to take a few steps to incorporate it as a nonprofit (also called forming a nonprofit).
Here are the main steps to consider:
Choose a non-profit company name
This one’s pretty self-explanatory, but remember that your business name will help communicate your mission since nonprofits are generally involved in public advocacy and development.
There might be a few laws and naming restrictions specific to your state, so be sure to check those.
Decide on a board of directors and draft bylaws.
You’ll need to draft bylaws that govern your nonprofit’s purpose, mission, and procedures. Then, choose the people who will help your organization and enforce these bylaws.
Some states require multiple directors to be involved; others require only one. You’ll want to check your local laws and may seek a business attorney to help you navigate this process more easily.
File your articles of incorporation.
To form a nonprofit company, you’ll need to file articles of incorporation, which is formal paperwork declaring your group as a non-profit. (This is much like filing paperwork as a for-profit business.)
How to do it—as well as the small fee you’ll incur for doing so—will depend on the state in which you incorporate. You can look up some guidelines for doing so, as well as the specific language you may have to use to ensure your tax-exempt status.
Apply for your tax-exempt status.
Simply incorporating doesn’t automatically give your nonprofit organization/company tax-exempt status. You’ll need to file some additional paperwork so the IRS will recognize you as tax-exempt.
Depending on the type of nonprofit corporation you form, you’ll have to fill out some different paperwork. This will depend on the type of work you do and the size of the organization you’re forming.
Obtain licenses and permits that your business needs.
You may need to apply for and get approval for federal, state, and local business licenses and/or permits to carry out your non-profit corporation’s function.
Forming a nonprofit corporation is not for every company—some might have different goals or missions. But suppose you’re excited about doing something for the greater good. In that case, a non-profit can help your organization accomplish the goals that you need by providing benefits, credits, exemptions, and special benefits.
Forming a nonprofit company isn’t hard; just make sure you pay attention to the details so you can take advantage of those benefits. The work upfront is worth the good you’ll do later on.