Nonprofit corporations differ from profit corporations primarily because any surplus revenue that the corporation earns is used for the corporation’s approved purpose instead of distributed to owners or shareholders. Nonprofit corporations also enjoy exemptions from at least some federal income taxes, but only if they successfully obtain what is known as 501(c)(3) status.
Corporations may file for 501(c)(3) status by filing I.R.S. Form 1023. For approval, the corporation must be organized solely for religious, charitable, scientific, testing for public safety, literary, or educational purposes, to foster national or international amateur sports competition, promote the arts, or the prevention of cruelty to children or animals.
Filing for 501(c)(3) status can be a complicated and time-consuming process, and in some instances nonprofits are better off not filing at all. For instance, nonprofits that do not generate business income have nothing to gain from tax-exempt status. Likewise, nonprofits that generate business income, but only from activities other than their nonprofit purpose will not benefit from tax-exempt status. On the other hand, 501(c)(3) status is oftentimes required to receive certain government grants and charitable contributions, so nonprofits pursuing these options would want to file.
While nonprofit corporations can and most times should pay salaries to employees, their primary purpose is to pursue an objective that benefits the public in an approved way. As such, nonprofits must meet strict requirements not only in their organization, but also in their operation to retain tax-exempt status. Engaging in restricted activities can jeopardize a nonprofit’s 501(c)(3) status. For instance, participating in certain political or lobbying efforts can threaten a nonprofit’s tax-exempt status. Likewise, generating too much business revenue from activities not related to the nonprofit’s approved purpose can raise complications for a nonprofit. To ensure compliance with 501(c)(3) protocol, nonprofits should counsel with an experienced attorney about activities and practices from which they should refrain.
