Not all corporations are created equal. For-profit corporations include large publicly traded corporations, such as Microsoft, and tiny entities, such as mom-and-pop stores, which are rarely publicly traded. On the other hand, non-profits include super-PACs, charities, churches, and professional organizations. Both state and federal laws make sharp distinctions between the two, as there are important organizational differences and tax implications.
All corporations are formed under state law, which distinguishes between nonprofit and for profit corporations. For example, Division I of the California Corporations Code pertains to for-profit corporations while Division II pertains to non-profits. Regardless which code sections apply, all states require incorporators who form a corporation to submit Articles of Incorporation to the Secretary of State, or similar regulatory agency, and pay a fee.
While both non-profits and for-profits are governed by a board of directors, for-profit corporations are owned by their shareholders while non-profits don't have any owners. In effect, non-profit assets are held in trust and used to advance the particular purpose of the organization. Other structural differences involve the board of directors. While a for-profit corporation can have a single director, state laws require two or more directors for nonprofits. For example, California requires nonprofit boards to have a president or chair, a treasurer and a secretary. The law states that neither the secretary nor the treasurer can also concurrently serve as president - which in effect means the board must have at least two members.
The purpose of a for-profit corporation is to make money for the benefit of individual shareholders. On the other hand, non-profits don't have any shareholders, so they serve a different function. Some states, such as California, categorize nonprofits as public benefit, mutual benefit or religious entities. A public benefit corporation is one created for a charitable purpose, such as the National Kidney Foundation or Red Cross. Mutual benefit organizations include professional organizations, chambers of commerce and entities such as the AARP and NAACP. Other states, such as New York, make the same distinctions, but refer to these categories by different names.
Being a non-profit corporation has important tax benefits that are not available to for-profit corporations. Non-profits can be exempt from paying federal taxes if they qualify under section 501(c) of the IRS code. Section 501(c)(3) provides additional benefits for donors, if the non-profit qualifies under this section. Generally, these benefits to donors are not extended to non-profit mutual benefit organizations organized under other subsections of this law. States that levy income taxes usually exempt nonprofit corporations if the corporation qualifies as such under federal law. New York City even exempts some nonprofits from property taxes. Always check the tax laws in your particular jurisdiction.
- California Corporations Code; Table of Contents
- Justia US Law: 2006 New York Code - Not-For-Profit Corporation
- Justia US Law: 2010 New York Code BSC - Business Corporation
- Board Source; What is a 501(c)(4) organization?
- California Secretary of State; Organization of California Nonprofit, Nonstock Corporations
- IRS; Exemption Requirements - Section 501(c)(3) Organizations
- NYC.gov: Property Tax Exemption for Not-For-Profit (NFP) Organizations
- California Corporations Code; Corporations Code Section 5210-5215
- California Secretary of State; Corporate Filing Tips
Shelly Morgan has been writing and editing for over 25 years for various medical and scientific publications. Although she began her professional career in pharmacological research, Morgan turned to patent law where she specialized in prosecuting patents for medical devices. She also writes about renal disease and hypertension for several nonprofits aimed at educating and supporting kidney patients.