Non-Profit Corporation vs Public Benefit Corporation
When starting a new business in Delaware, the owners of the business will have to start by choosing the type of entity that suits their goals. Limited Liability Companies and General Corporations are the most common choices, but other business entities, such as the non-profit and the benefit corporation, are designed for business owners who are trying to benefit the public.
If that sounds right up your alley, then that begs the question: Should I form a Public Benefit Corporation or a Nonprofit? While both Public Benefit Corporations (PBCs) and non-profits share a commitment to social or environmental goals, these two entities have very different structures and purposes. Let's dive into some of the similarities and differences between the Public Benefit Corporation and the Non-Profit Corporation.
Ownership Structure
One of the chief differences between a non-profit corporation and a benefit corporation is the ownership factor. To put it simply, a public benefit corporation is a for-profit company with shareholders who own equity in the business, while non-profits have no owners or shareholders.
A traditional non-profit (or not-for-profit) company aims to serve the public without making a profit, as defined by the IRS. This means that the non-profit company isn’t really owned by anyone. As such, any revenue generated must be reinvested into the organization’s mission rather than distributed to private individuals. This structure is designed to ensure accountability to the public interest rather than to investors.
On the other hand, the shareholders of a benefit corporation (called a public benefit corporation in Delaware) actually own the company as well as its assets. A benefit corporation is a type of General Corporation, meaning that the company is owned by shareholders who can buy, sell, and transfer their ownership interests just like in a traditional corporation. While a benefit corporation commits the company to spending some of its profits or resources (or both) in support of a specific public benefit, the shareholders still expect the company to make a profit and return some of that money to them as dividends. If a PBC decides to stop doing business and dissolve, the shareholders will receive the proceeds from the sales of assets, after liabilities are paid.
Profit Distribution
As we just alluded to, profits are treated very differently for these two types of businesses. A benefit corporation uses profit as both a means of reward and impact, while a Non-Profit treats profit as a tool solely to further its mission, not to benefit any private party.
By law, a non-profit cannot distribute any funds to individuals in the company. Any surplus revenue must be reinvested into advancing the organization’s mission. Non-profit organizations may compensate their employees, but they cannot use profits for private enrichment. In fact, if a non-profit company decides to stop doing business and dissolve, it must distribute its assets among other non-profits.
A benefit corporation operates quite differently. Since these businesses operate as for-profit companies, they can distribute profits to their shareholders or owners as they see fit. What separates them, however, is their dual mission. While financial success is important, leadership must also ensure that profit-making decisions align with the company’s public benefit purpose.
C corporations and S corporations frequently commit some of their profits to charitable events and endeavors, without the legal distinction of being a benefit corporation. The difference is that these companies contribute charitable donations voluntarily, and their financial commitment can change from year to year. With a PBC, the company is committed to dedicating resources or funds toward its chosen public benefit, and shareholders cannot simply reduce the commitment from year to year.
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Tax Status
The main difference in taxation between non-profit corporations and public benefit corporations lies in their tax-exempt status. Non-profit corporations are generally eligible for tax-exempt status, while benefit corporations are taxed as for-profit entities.
Non-profit organizations that qualify under IRS Section 501(c)(3) enjoy tax-exempt status. This means they do not pay federal income tax on revenue related to their charitable mission. Since it has no profit, it pays no taxes. Maintaining this exemption requires strict compliance with Federal Income Tax Law. The non-profit will be required to file a tax form each year (IRS Form 990), which is public record and includes information about the company’s finances and Board of Directors.
Meanwhile, a PBC pays taxes on its profits like any other for-profit business. It can elect to be taxed as a C corporation, where profits are taxed at the corporate level and again when distributed as dividends, or as an S corporation if eligible, allowing profits and losses to pass through to shareholders’ personal tax returns. While benefit corporations pursue social or environmental goals, they do not receive any special tax exemptions for doing so.
Funding
Non-profit companies raise money through donations, grants, and fundraising activities. Keep in mind that they cannot issue stock or provide equity stakes, as no ownership interests exist. As an incentive to donate to these businesses, individual donors may deduct their contributions from their ordinary income on their federal tax returns, but they cannot profit from or receive anything of value for their contributions.
Delaware public benefit corporations can raise money by selling stock privately or publicly, and by issuing any kind of debt instrument available to General Corporations. Like other for-profit businesses, PBCs can attract funding from venture capitalists, private equity firms, or individual investors as they please. They can also generate income by selling products or services.
Formation Process
Creating a non-profit corporation is a two-step process. First, the organization should form a Delaware Non-Stock company. When preparing your Certificate of Incorporation, you must create a mission statement acceptable to the IRS. It should state the altruistic purpose to which the corporation is dedicated. For example, a non-profit can pledge to benefit one specific group of people, fund research for a particular disease, build a public dog park, or support a religious, charitable, scientific, or public safety mission.
The second step to forming a non-profit is to submit an application to the IRS to request non-profit status. This is accomplished by submitting IRS Form 1023. In order to qualify for non-profit status with the IRS, your Delaware Certificate of Incorporation must include a mission statement that declares your mission and identifies the IRS subsection under which you intend to apply.
To form a public benefit corporation, file a Certificate of Incorporation in the state of Delaware for a General Corporation with a public benefit clause in it. No subsequent filing with the IRS is necessary. A Delaware PBC’s Certificate of Incorporation must clearly state that the entity is a public benefit corporation and must list the company’s objectives. However, unlike the non-profit company, the PBC may be engaged in a profitable enterprise of a very different nature from its mission, such as making food products, engaging in real estate investments, or any other for-profit enterprise.
For example, when the crowdfunding platform Kickstarter converted to a Public Benefit Corporation, it released this statement on its website:
“When we became a Benefit Corporation, we amended our corporate charter to lay out specific goals and commitments to arts and culture, making our values core to our operations, fighting inequality, and helping creative projects come to life.”
Ongoing Compliance
Non-Profit compliance focuses on transparency and adherence to rules that preserve its eligibility for tax-exempt status. As such, these organizations have rather extensive compliance requirements. Each year, when it files Form 990 with the IRS, the non-profit will need to detail its financial activities and program accomplishments to prove that it is still pursuing its original goal. Non-profits must also adhere to restrictions on private benefit and how funds are used to maintain their exemption.
A PBC must comply with all standard corporate formalities, such as holding annual meetings, maintaining records, and filing annual reports with the state. In addition, many states, Delaware included, require PBCs to produce a benefit report, which outlines how the company pursued its public benefit. In Delaware, this report must be provided no less than biannually.
Examples of Non-Profit Corporations
While the structural and legal distinctions are important, it can also help to look at real-world examples. Below are some well-known examples that illustrate how diverse and impactful Non-Profit organizations can be:
- Museum of Modern Art
- Human Rights Campaign
- Sierra Club
- Humane Society of the United States
- Boy Scouts and Girl Scouts
- Smithsonian Institute
- Ted Talks
- World Wildlife Fund
- PBS
- Best Friends Animal Society
- American Civil Liberties Union
- Susan G. Komen Breast Cancer Foundation
On a smaller, more local level, homeowner associations and Little Leagues can also be non-profit organizations.
Examples of Public Benefit Corporations
Similar to Non-profits, many modern companies have embraced the benefit corporation model to blend profit with purpose. Below are some notable examples of PBCs leading the way:
- Method, the organic soap and cleanser company
- King Arthur Flour
- Plum Organics, one of the largest manufacturers of organic baby food in the world
Which Is Best for You?
Both Public Benefit Corporations and Non-Profit Corporations aim to make a positive impact, but they do so with slightly different methodologies. If you need help deciding which type of business is best for you, here is a quick summary of how non-profit corporations and public benefit corporations differ.
If you'd like to form a public benefit corporation or a non-profit in Delaware, our team at Harvard Business Services, Inc. can help facilitate the process. You can form a corporation on our website and select "Delaware Pubic Benefit Corporation (C-Corp or S-Corp)" or "Delaware Non-Profit Corporation (501c3)" to get started.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.