A nonprofit corporation is a corporation formed to carry out a charitable, educational, religious, literary or scientific purpose. A nonprofit can raise funds by receiving public and private grant money and donations from individuals and companies. Certain federal, state, and local income, property and sales tax exemptions are available to nonprofit corporations. The federal and state governments do not generally tax nonprofit corporations on money they make that is related to their nonprofit purpose, because of the benefits they contribute to society.
The most common federal tax exemption for nonprofits comes from Section 501(c)(3) of the Internal Revenue Code, which is why nonprofits are sometimes called 501(c)(3) corporations. Tax exempt nonprofit organizations offer donors an individual deduction for contributions. (Private donors can claim personal federal income tax deductions of up to 50% of adjusted gross income for donations made to 501 (c) (3) organizations.)
Like any corporation, a nonprofit has a board of directors to make important policy decisions, officers (president, treasurer and secretary) to oversee and manage the day-to-day operations of the organization, and possibly employees to do the work. Unlike regular corporations, however, nonprofit corporations do not have shareholders or owners. Nonprofits are owned by no one person or group of persons and cannot be sold.
The members, directors and officers of the corporation are generally prohibited from profiting at the expense of the corporation. The assets, income or profits may generally be distributed to such people only as compensation for services, as a distribution of assets upon dissolution of the corporation, as payment of dividends to members as provided for in special instances in articles of incorporation, or when profit derived from sales to members is rebated to members in proportion to fees paid by members.
Administrative expenses and promotional expenses, including compensation of employees and independent contractors, must be commensurate with the organization's financial resources and capabilities. If an organization raises funds for a charitable purpose but consistently uses virtually all its income for administrative and promotional expenses with little or no distribution to the charitable purpose, the board of directors has failed to exercise due care.
