A Nonprofit Corporation is a unique form of business entity where the primary goal of the business is some kind of public service or benefit, rather than generating a large profit for its shareholders. Nonprofit Corporations can apply for ‘tax exempt status’ with the IRS and State, but, by the same token, may not distribute profits to their directors.
Nonprofit Corporations are distinct entities from their directors. Often, the directors are not truly considered ‘owners’ or ‘shareholders,’ as is the case in a C Corporation or S Corporation. Because of this, liability for the actions of the corporation will normally fall only on the corporation itself.
Once a Nonprofit Corporation qualifies for tax exempt status with the IRS, they no longer have to pay income taxes at all, at the corporate or individual level. However, in most cases, these organizations will still be required to file annual reports (called 990-series returns). These reports detail the gross proceeds of the corporation and how monies were spent. While a Nonprofit can be wages to its directors, the wages are taxed as individual income and not considered taxes on the income of the corporation itself.
- Eligibility for Federal and State grant programs
- Limited liability allows Directors to focus on the mission of the organization rather than personal liability
- Means of avoiding income tax for a not-for-profit organization
- Cannot be used as an alternative entity type to avoid taxation for a profit motivated business
- Difficulty in recruiting and keeping good quality employees to limits on compensation and pay potential
- Paperwork and ongoing compliance is normally much more complex than for similar ‘for-profit’ entities
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