What type of Corporation is a Nonprofit?
Nonprofit organizations or foundations (NPOs) are quite different than other business entities because their purpose is not to make profits for the owner(s).
Instead, nonprofits are formed to further a particular social cause for charitable, literary, scientific, religious, educational, or other cause and they operate under section 501(c) of the Internal Revenue Code.
Furthermore some nonprofits operate with a tax exemption.
Their main purpose is not to make a profit but to further a social cause or a shared goal or mission.
Types of Nonprofit Organizations
Under the IRS 501(c) code, there are two main types of nonprofits:
- Nonprofit Organizations (NPO) – serve the public via goods and services
- Not-for-profit Organizations (NFPO) – may serve just as a group of members or a more private focused group of members
Aside from the two major types of nonprofits mentioned above, there are actually about three dozen different types of nonprofits that fall under those two categories.
Other popular types include:
- Section 501(c)(4): civic leagues and social welfare organizations, homeowners associations, and volunteer fire companies.
- Section 501(c)(5): labor unions
- Section 501(c)(6): chambers of commerce.
- Section 501(c)(7): Social and Recreational Clubs
- Section 501(k): childcare-related organizations.
There are many others in the U.S. Internal Revenue Code and you can view them here.
Is a Nonprofit Corporation a C Corporation?
No, a nonprofit organization is not a C corporation.
As mentioned above, nonprofits operate under section 501(c) of the Internal Revenue Code and many of them operate under a tax exempt status.
C Corporations pay taxes under Chapter C of the IRS tax code, which is where the name comes from.
However there are some similarities between a nonprofit and c corporation.
Nonprofit Organization and C Corporation – Similarities
- Limited liability protection – both types of business entities provide protection to the shareholders from liabilities that may arise from the corporation
- Formation process – the early stages of the business formation process is almost identical and both are formed at the state level
- Profit – many people think that nonprofits do not actually make a profit, but this is not true. Like c corporations, profits for both business types are given to the owners or shareholders. In c corporations, the owners keep the profits for their own use while in a nonprofit, the owners use the profits to further the goals of the organization.
- Taxes – no business entity type is 100% tax exempt, even tax-exempt nonprofits may pay taxes on some of their income. Just like c corporations, nonprofits pay taxes to federal and state governments.
- Employee benefits – both c corporations and nonprofit organizations can offer employee benefits
Nonprofit Organization and C Corporation – Differences
- Shareholders – any profits made in a c corporation are given out as dividends to the owners while profits in a nonprofit go back into the organization. If a nonprofit were to dissolve, proceeds would go to another nonprofit, not the owners.
- Taxes – nonprofits are exempt from a number of taxes that a c corporation is required to pay such as corporate tax. Nonprofits are usually exempt from state sales tax as well while c corporations are not.
- Tax Filings – Nonprofits need to file specifically under Section 501(c) of the Internal Revenue Code while c corporation file under Chapter C.
- Contributions – Contributions from donors to 501(c)(3) nonprofit corporations can be written off for taxes, but investment in a C corporation may be taxed.
- Lobbying and Political Campaigns – many nonprofit organization are prohibited from participating in lobbying or political campaigns while many c corporations participate in these activities.
As you can see, even though nonprofit organization and c corporations are not the same thing, they do share a few similarities.
They both have a similar formation process and they both offer liability protection to the owners.
Regardless of these similarities, they are recognized as totally different type of business entities by the IRS.
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