What Is the Difference Between a Nonprofit and a Mutual-Benefit Corporation?

When you think of a "nonprofit," you likely envision an organization that provides a public service, such as feeding the hungry, and accepts tax-deductible donations. However, this is only one type of nonprofit entity. A mutual-benefit nonprofit is a type of nonprofit corporation that works for the betterment of a select group of members, rather than for the benefit of the public.

Nonprofits are typically structured as corporations. They are formed under state laws by filing formation paperwork, generally known as articles of incorporation, with a state business registration office, just like a regular for-profit corporation. However, each state has a special statute that governs the formation and operation of corporate entities that are not owned by individual shareholders or operated to make or maximize profits. In most states, corporate entities that can be formed under the nonprofit statute fall into one of a few categories, such as public benefit, mutual benefit or religious.

Read More: How to Change a Corporation From Nonprofit to Profit

The public-benefit nonprofit corporation is the type of nonprofit that most people think of when they're using the generic term "nonprofit." It is typically organized for charitable purposes that will benefit the public generally or a segment of the public, such as a specific community. Social services, educational programs and artistic endeavors are the types of projects that generally fall into this category.

A nonprofit corporation classified as a mutual-benefit organization has a mission that benefits only a select group of people. The most obvious type of mutual-benefit nonprofit is a membership organization, such as a union, business chamber of commerce or homeowner's association. While a mutual-benefit nonprofit shares the same underlying structure as a public-benefit corporation, the scope of its mission is narrowly focused to serve a defined class of beneficiaries.

The primary distinction between public- and mutual-benefit nonprofits is in their treatment by the Internal Revenue Service. Section 501 of the federal tax code classifies nonprofit entities and establishes two benefits for which nonprofits can qualify: tax exemption and tax-deductible donations. Both public- and mutual-benefit nonprofits can apply and qualify for tax exemption, so they won't have to pay federal income taxes on revenues. However, only public-benefit corporations, classified as charitable organizations by the IRS, can apply and qualify under section 501(c)(3) of the tax code to receive tax-deductible donations. Charities rely on this provision to raise money from the public to support their activities. Meanwhile, mutual-benefit nonprofits typically raise money by charging annual dues, which are paid by members.