The Difference Between Non-Profit Corporations & For-Profit Corporations

By Shelly Morgan

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.

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.

State Law

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.

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Structural Differences

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.

Purpose

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.

Tax Implications

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.

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

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What Are the Duties of a Non-Profit President?

The duties of the president of a nonprofit corporation are defined by federal and state law, as well as by the articles of incorporation and bylaws of the organization itself. The laws that govern the creation, organization and operation of a nonprofit corporation are those of the state within which it is established. Applicable federal law pertains primarily to matters of tax exemption, accounting and financial reporting; they are enforced by the Internal Revenue Service, or IRS, and the Securities and Exchange Commission, or SEC. Because they are created to serve some public benefit, nonprofit corporations and their presidents not only have to follow many of the same rules as for-profit corporations, but are held to additional standards as well.

501(c)(3) Types

Federal taxes are a significant expense for many businesses, but not for exempt non-profits. Non-profit charities that are organized under Internal Revenue Code Section 501(c)(3) are generally tax-exempt, and their donors usually get tax breaks for supporting them. The IRS divides these charities into two categories: public charities and private foundations.

The Texas Non Profit Corporation Act

Nonprofit corporations in Texas are governed by Chapter 22 of the Texas Business Organizations Code. Though forming a nonprofit corporation doesn’t automatically mean your organization will be tax-exempt under IRS rules, creating the corporation is often a first step toward tax-exempt status. Forming a corporation also allows your organization’s personnel to shield themselves from some liability risks.

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