What Is a Non-Profit Company?

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“Non-Profit Corporation” is generally used to refer to a corporation that has been granted 501(c) (tax-exempt) status by the IRS.

The term "non-profit corporation" is something of a misnomer, but is a way to informally speak of a generally-understood type of entity that is exempt from taxation, as long as it satisfies certain criteria.

Starting a non-profit company in Delaware is a two-step process:

  1. The business entity is formed as a Delaware non-stock corporation

    Although a non-stock corporation is not the only form a non-profit entity may take, it is commonly used in Delaware. The terms and provisions governing non-stock corporations are built into the Delaware General Corporation Law (the “DGCL”), and are structured to facilitate the second step below.

    The DGCL also requires certain information to be included in a non-stock corporation’s Certificate of Incorporation and other relevant documents.
     
  2. The non-stock corporation applies for non-profit status with the Internal Revenue Service (the “IRS”). 

    This application for 501(c) status, made on IRS Form 1023, must be completed and filed with the IRS within 15 months of the non-stock corporation’s formation.

    In order to qualify for a Delaware non-profit company status with the IRS, your Delaware Certificate of Incorporation must include the proper and appropriate clauses that declare your mission and identify the IRS subsection under which you intend to apply. (The required language can be found on the IRS website.)

While a non-stock corporation’s tax-exemption is dealt with directly by the sponsor and the IRS, Delaware has provided persons seeking to form a not-for-profit company with specific language to be included in a non-stock corporation’s Certificate of Incorporation to comply at the outset with IRS requirements.

Except where specifically noted in the DGCL, non-stock corporations are governed by the same law and requirements as corporations generally. As with a general corporation, for instance, the non-stock corporation is governed by its board of directors, which may appoint and delegate authority to officers.

Are there Shareholders in Non-Profit Corporation?

 

Unlike some other types of corporations, there are never any shareholders (or owners) in a Delaware non-profit company, because there are no shares of stock. Those that work in a non-profit are know as the Board of Directors.

Learn more about non-stock corporations.

Because it intends to register as a non-profit entity with the IRS, certain features of the corporation are determined by IRS requirements. For example, generally, no person may profit from the activities or operations of a non-profit corporation, as would be the case in (and the ultimate goal of) in a general for-profit corporation. However, this does not mean that the people working within the non-profit donate their time -- non-profit companies can pay their staffs salaries and bonuses like any corporation would.

In addition, a non-profit must adopt policies to address situations where a director faces a conflict of interest, as no person can derive a financial or other improper benefit from its work for or association with the non-profit company.

 

Qualification to be a Non-Profit Corporation 

Generally, to qualify to be a non-profit corporation you will need the following qualifications:

- The organization will need to be filed as a legal entity with a Certificate of Incorporation.

- The organization must serve a public benefit or purpose rather than benefiting private individuals or entities. These purposes are often charitable, religious, or educational.

- The organization's income or assets cannot be used for the private benefit for any individuals. This includes directors, employees, or substantial contributors.

- Non-profit corporations cannot have shares of stock. Since nonprofits are not established for the purpose of generating profits for shareholders, selling stock would disqualify you from tax exempt status.

- Delaware nonprofit corporations are required to file an annual report that demonstrates responsible financial management in accordance with their mission statement.

Once granted tax-exempt status, organizations must compy with reporting and filing requirements to maintain their tax exempt status.

Can a Non-profit be an LLC?

Typically, non-profit organizations are structured as a non-stock corporation and the proper 501(c) tax exemption is submited to the IRS for this status. It may be best to speak with your accountant to know exactly if an LLC is suitable for your business. 

Are Non-profits Tax Exempt?

 

Generally, non-profit organizations, like charities and religious organizations, can be granted tax-exempt status by the IRS. To qualify for tax-exempt status, the organization must apply for 501(c) tax exemption. Keep in mind that not all non-profit organizations may qualify for tax-exempt status. To find out if your organization would qualify it would be best to speak with an accountant.

501(c)(3) and Other Tax-Exempt Statuses

Non-profit status requires that the corporation’s purpose reflect certain types of activities. For example, entities exempt from taxation under Section 501(c)(3), the most commonly used non-profit exemption, may focus their efforts on relieving poverty, community betterment and beautification, promoting the arts, public health and preventative health, social welfare and social justice, environmental conservation and advocacy, and scientific goals aimed at serving the non-commercial public good, among other things. 

Other exemptions under Section 501(c) of the Internal Revenue Code permit tax exemption for other types of activities, including, for example:

  • 501(c)(4) – Civic organizations for the good of the community, employee associations devoted to charitable, educational, or recreational purposes for the employees of one employer,
  • 501(c)(5) – Labor organizations intended to improve worker safety, conditions, or efficiency,
  • 501(c)(6) – Trade associations for a single trade (not a mixed group of trades) and business groups that promote a common interest, such as a Chamber of Commerce, 
  • 501(c)(7) – Social clubs for pleasure and recreational purposes, so long as they are funded by member dues with only an immaterial amount of funds being raised by the public (e.g., fraternities and sororities, tennis clubs, and lunch and dinner clubs), 
  • 501(c)(13) – Cemeteries not intended to make a profit where the plots are exclusively for members, and
  • Section 527 – Certain political groups, political parties, political action groups.

There are certain restrictions on 501(c) tax-exempt entities’ ability to engage in political activity, among other things, so a non-profit sponsor creating an entity should carefully learn what action is permitted under the relevant exemption employed.  

Start a Delaware Non-Profit Company

We have helped countless clients in creating compliant filings and in launching their non-stock corporation with non-profit status built into the structure of the entity and its constituent documents.  We can help with yours as well. 

Get started now or just call one of our experienced non-profit incorporation experts at 1-800-345-2677. You can also e-mail us and we'll walk you through the process of formation as we take the necessary steps on your behalf.

Form a Non-Profit Corporation Now

Key Elements of Non-Profit Companies

Non-Profit Corporations are Frequently Used For

 

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