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

By Michelle Kaminsky, J.D.

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

By Michelle Kaminsky, J.D.

Each state has laws governing the formation and operation of nonprofit corporations, which are business entities that are not owned by individual shareholders or operated to make or maximize profits.

Man presenting in front of poster that says "charity" at front of desk with office people looking up at him

Nonprofits, just like for-profits, are typically structured as corporations and formed under state laws by filing articles of incorporation with the Secretary of State or other agency that handles business registrations.

Two common types of nonprofit organizations are public-benefit and mutual-benefit.

Public-Benefit Nonprofit Corporations

A public-benefit nonprofit is the type of nonprofit most people think of when using the generic term “nonprofit." It is typically organized for charitable purposes that will benefit the public or a segment of the public, such as a specific community.

Social services, educational programs, and artistic endeavors generally fall into this category.

Mutual-Benefit Nonprofit Corporations

A mutual-benefit nonprofit is a type of nonprofit corporation that works for the benefit of a select group of members rather than for the general public. The most obvious type of mutual-benefit nonprofit is a membership organization such as a union, a business chamber of commerce, or a 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. All revenue of a mutual-benefit nonprofit generally comes from its members and must return to benefit members. Mutual-benefit nonprofits typically raise money by charging their members annual or monthly dues.

Federal Tax Benefits

An important distinction between public- and mutual-benefit nonprofits is their federal tax status. Section 501 of the Internal Revenue Code classifies nonprofit entities and establishes two benefits for which nonprofits may qualify: tax exemption and tax-deductible donations.

Public-benefit nonprofits may qualify as charitable organizations under section 501(c)(3) of the tax code, making them eligible to receive tax-deductible donations. Charities rely on this provision to raise money from the public to support their activities. Public-benefit nonprofits may also qualify for tax exemption, which means they don't have to pay federal income taxes on revenues.

Note that a religious nonprofit may also receive these tax benefits so long as they adhere to the requirements of Section 501(c)(3).

Mutual-benefit nonprofits, on the other hand, are not charities as they do not benefit the general public. The federal government taxes the profits of a mutual-benefit organization at the corporate tax rate just like a C corporation.

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