What Type of Corporation Is a Nonprofit?

A nonprofit is a type of corporation created under state law, but its purpose is fundamentally different from a standard business. Instead of operating to generate profits for owners or shareholders, a nonprofit is organized to serve a public or social benefit. These purposes can be wide-ranging, including charitable, educational, religious, or scientific activities. While they can and often do generate revenue, all funds must be reinvested back into the organization’s mission-driven programs and operations. The legal framework for these entities is established at the state level, defining them as distinct corporate bodies.

The Nonprofit as a Corporate Entity

A nonprofit is legally structured as a corporation, which means it is recognized as a separate legal entity distinct from the individuals who founded or run it. This corporate structure provides a liability shield for its board members and staff, meaning they are generally not personally responsible for the corporation’s debts or legal liabilities.

The most significant structural difference lies in the “non-distribution constraint.” This is a rule prohibiting a nonprofit from distributing its net earnings to any private individuals, such as its officers, directors, or members. This stands in direct contrast to a for-profit corporation, which is designed to distribute profits to its shareholders. Because those in control cannot personally profit from excess revenues, there is less incentive to prioritize financial gain over the quality of services provided.

A nonprofit corporation does not have shareholders or owners in the traditional sense; instead, it is governed by a board of directors who are accountable for ensuring the organization adheres to its charitable purpose and complies with all legal requirements. If a nonprofit dissolves, its remaining assets must be distributed to another nonprofit organization, not to private individuals.

State-Level Formation Requirements

The creation of a nonprofit corporation begins at the state level by filing foundational documents with the designated state agency, typically the Secretary of State. The primary document is the Articles of Incorporation. This document formally creates the nonprofit and must contain specific information required by state law.

Key components of the Articles of Incorporation include the official name of the organization, which must be unique and often must include a corporate identifier like “Corporation” or “Inc.” It also requires the principal street address of the nonprofit and the name and physical address of a registered agent who can accept legal documents on its behalf. The articles must contain a clear and specific statement of purpose, outlining the charitable, educational, religious, or other nonprofit mission the organization will pursue.

Alongside the articles, founders must draft corporate bylaws. These are the internal operating rules for the organization and are not typically filed with the state but are for governance. Bylaws detail procedures for holding board meetings, electing directors and officers, and managing other corporate formalities.

Finally, the incorporators must appoint an initial board of directors, which commonly requires a minimum of three individuals. This board oversees the organization’s activities and ensures it operates in accordance with its stated purpose and legal obligations.

Obtaining Federal Tax-Exempt Status

After a nonprofit corporation is formed at the state level, the next step is to apply for federal tax-exempt status from the Internal Revenue Service (IRS). This status is not automatic and requires a formal application process. Obtaining this exemption means the organization will not have to pay federal income tax on revenue related to its exempt purposes. For organizations classified under Internal Revenue Code Section 501(c)(3), it also allows them to receive contributions that are tax-deductible for the donors.

The primary application for 501(c)(3) status is IRS Form 1023, “Application for Recognition of Exemption.” The IRS scrutinizes this application to ensure the organization is organized and operated exclusively for exempt purposes. For smaller organizations with projected annual gross receipts of $50,000 or less, a streamlined version, Form 1023-EZ, may be an option.

While 501(c)(3) is the most common classification for charities, other types of nonprofits exist, such as 501(c)(4) social welfare organizations and 501(c)(6) business leagues, which have different rules and benefits. The application process requires a user fee, which is $600 for Form 1023 and $275 for Form 1023-EZ, and must be submitted electronically.

Key Distinctions in Nonprofit Classifications

Once an organization successfully obtains 501(c)(3) status, the IRS further classifies it as either a “public charity” or a “private foundation.” Private foundations are subject to more stringent operating rules and regulations. By default, the IRS presumes a 501(c)(3) organization is a private foundation unless it can demonstrate that it qualifies as a public charity.

The primary factor determining this classification is the source of the organization’s financial support. Public charities receive a significant portion of their funding from the general public, government grants, or a combination of many small donations. Examples of organizations that are often automatically classified as public charities include churches, schools, and hospitals.

In contrast, a private foundation derives its financial support from a very limited number of sources, such as a single individual, a family, or a corporation. Because their funding is not from the public, they are subject to stricter regulations to prevent abuse. These rules include minimum annual distribution requirements, where the foundation must pay out a certain percentage of its assets for charitable purposes each year, and excise taxes on their net investment income.