| A "nonprofit" corporation may seem like a misnomer if activities of the corporation generate a profit. However, if the objective of the nonprofit corporation is not to make a profit but to achieve charitable, educational, religious, literary, or scientific goals, then those profits normally would not be subject to federal taxation. This feature of a nonprofit corporation has led to use of the term "501(c)(3) corporation" in recognition of the section of the Internal Revenue Code that provides for the exemption from taxation.
Other benefits may result from formation of a nonprofit corporation. For example, a principal benefit for individuals forming a nonprofit corporation is that those individuals under normal circumstances will be shielded from personal liability for the debts and liabilities of the corporation. This can be especially important if activities of the corporation prove controversial and lead to litigation and possible liabilities. For example, a group seeking to educate the public on environmental effects of development may hinder the efforts of a developer. If the group's legitimate efforts are conducted through a corporation, then in normal circumstances liability that might arise from a legal action by the developer would be imposed on the corporation but not on the individuals that set up and operated the corporation.
Other potential benefits suggest formation of a nonprofit corporation. Nonprofit corporations may seek gifts or contributions that will be a tax deduction for the contributors if the nonprofits are properly formed and conducted for permissible purposes under the Internal Revenue Code. This tax-deductible status for contributions to nonprofit corporations can be a significant source of income for the nonprofit.
Nonprofit corporations also may be eligible for preferences in obtaining government and foundation contracts and grants. Further, nonprofit corporations may obtain permits from the U.S. Postal Service that will allow the nonprofits to mail items at a significantly reduced cost. Finally, many states and local governments provide an exemption from property and other taxes for nonprofit corporations. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |