Is a Nonprofit Corporation a C Corporation: Everything You Need to Know
Is a nonprofit corporation a C corporation? No, a nonprofit corporation is not a C corporation. Nonprofit corporations are regulated under Section 501(c) of the Internal Revenue Code.4 min read
Is a nonprofit corporation a C corporation? No, a nonprofit corporation is not a C corporation. Nonprofit corporations are regulated under Section 501(c) of the Internal Revenue Code. Unlike C corporations, the purpose of nonprofit corporations is not to make profits for the owners. Instead, nonprofits are formed for charitable, literary, scientific, religious, and other activities. Some nonprofit corporations have IRS tax-exempt status.
How to Form a Nonprofit Corporation
The process of forming a nonprofit corporation differs from state to state, but it is generally similar to the formation of a traditional corporation. The formation of nonprofits typically involves the following steps:
- Name Reservation
The owners of the corporation reserve a name with the state's secretary of state. The name should be unique compared to the names of other corporations in the state.
- Filing a Certificate of Incorporation
The Certificate of Incorporation, called the Articles of Incorporation in some states, documents basic facts about the nonprofit.
- Appointing a Board of Directors
The board of directors gives oversight to the nonprofit.
- Adopting Bylaws
The new board must hold a meeting to adopt bylaws and appoint officers of the corporation.
- Registering with the State and Federal Governments
The nonprofit can now apply for local permits and a federal tax ID.
- Applying for Tax-Exempt Status
After registration with the state, the nonprofit can apply for tax-exempt status. This is achieved by filing the IRS Package 1023 or Form 1023-EZ depending on the size of the corporation.
Types of Nonprofit Corporations
There are dozens of classes of nonprofits under Section 501(c) of the Internal Revenue Code. Not all these classes are eligible for tax-exempt status. Only organizations that file under 501(c)(3) can get tax-free donations. You can find details about nonprofit classifications and tax implications in the IRS Publication 557.
All organizations that have 501(c) designation file Form 990 with the IRS. You can see Form 990 of any nonprofit by contacting either the IRS or the nonprofit or by searching the online corporation database of the state where the organization was incorporated.
Similarities Between Nonprofit Corporations and C Corporations
Nonprofit corporations and C corporation have a number of similarities, such as the following:
- Limited Liability Protection
These protect the shareholders from liability arising from the corporation.
Both nonprofit corporations and traditional C corporations are formed at the state level. The initial stages of the formation of nonprofit corporations and C corporations are virtually identical.
- Profit Generation
Contrary to popular belief, many nonprofits actually make profits like C corporations. Profits of nonprofits are not given out to the owners but are used to further the goals of the corporation.
Some nonprofits pay taxes to the federal and state governments just like C corporations. Never make the mistake of thinking that your nonprofit corporation automatically has tax-exempt status. Even tax-exempt nonprofits may pay taxes on some of their income. A good tax lawyer can help you to understand the tax implications of the different non-profit classifications.
- Employee Benefits
There are some tax benefits for nonprofit corporation employees that are not available to C corporation employees. Such benefits may include group life insurance and medical insurance.
Differences Between Nonprofit Corporations and Traditional C Corporations
- Shareholder Benefits
Unlike C corporations, nonprofit corporations do not give out dividends to their owners. Any profits the corporation may make are used to pursue the organization's non-business goals. During the dissolution of 501(c)(3) nonprofits, the proceeds will go to another nonprofit and not to the owners of the corporation.
Tax-exempt nonprofits are exempt from a number of taxes that C corporations are required to pay. Nonprofits may be exempt from corporate tax, among other taxes. Nonprofits are usually exempt from state sales tax, and they may also qualify to apply for certain grants.
There are unique filing requirements that apply to nonprofits and not to C corporations. These requirements may exist both at the federal and state levels. At the federal level, nonprofits need to file specifically under Section 501(c) of the Internal Revenue Code.
- Political Activities
Some classes of nonprofits are prohibited from participating in activities like lobbying and political campaigns. Many C corporations participate in such activities.
Contributions from donors to 501(c)(3) nonprofit corporations can be written off for taxes, but investment in a C corporation may be taxed.
While nonprofit corporations are not C corporations, they share a number of similarities with C corporations. Both types of corporations have a similar initial formation process, and both give liability protection to the owners. Differences between nonprofit corporations and C corporations include filing requirements and tax treatment.
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