Nonprofit corporation

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This article is about Nonprofit corporation. For other uses of the term Corporation, please see Corporation (disambiguation).

Disclaimer: This article presents public policy information on nonprofit corporations. It is not intended as legal advice. Each of the categories of Section 501(c) identified encompasses a large number of additional, unstated information. Anyone seeking to act on any of these matters should seek advice as appropriate from a qualified attorney or accounting professional.

A nonprofit corporation is a legal and economic entity in the United States established under state law to govern, regulate and protect the assets of a range of charitable, educational, scientific, religious and other, similar activities and organizations and associations. Traditionally, nonprofit corporations are deemed legal individuals or "legal personalities" in their own right, separate from their founders and controllers and able to own property, enter into contracts, and incur debts of their own accord.

Under U.S. law, corporations are "legal personalities". The largest category of nonprofit corporation in the U.S. are exempt from federal (and state) taxation, donations to which may be tax deductible under Section 501(c)(3) of the IRS Code if they are nonpolitical, or 501(c)(4) if they engage in political activity. Currently, the federal tax code recognizes nearly two dozen different categories under Section 501. They include federally created corporations (501[c]1) that are expressions of federal policy, like the American Red Cross, the Corporation for Public Broadcasting, the Corporation for National and Community Service, legal services corporations (501[c]20) and black lung trusts corporations (501(c) 21) .

Nonprofit corporations differ in important ways from statutory public corporations, and ordinary business corporations like (C-corporations, S-corporations) and the newer type of B-corporations) or the newest class of social enterprises recognized by some states and countries including Canada, and the European Union . Most notably, nonprofit corporations as a group are characterized by exemption from federal taxation and various forms of nondistribution constraints that prohibit them from distributing "profits" (or operating surpluses in any form) to owners or shareholders. (Thus, the categorical name "nonprofit".)

The Nonprofit 'Membrane'

One of the distinctive general characteristics of nonprofit organizations -- in particular 501(c)3 "public charities" -- are legal requirements and expectations that function in a manner somewhat analogous to a biological membrane: Funds may pass easily and freely from a wide variety of private individuals, businesses, for-profit corporations into a nonprofit corporation, but explicit provisions prohibit and prevent comparable flows back to those original sources. Very much like a membrane, state laws allow funding to flow easily into the nonprofit sector and between various entities within the sector, but place very real limits on how and under what circumstances funding may flow back into the private sector.

One key to the operation of this membrane is the explicit declaration of a mission, goals and objectives specifying that the corporation exists for some recognized charitable, educational, religious, or scientific purposes. Two other standard features of state nonprofit corporation law also work together to define and maintain the membrane. These are generally termed non-distribution constraints and dissolution of assets requirements.

In the U.S. legal system generally, nonprofit corporations are defined, and to a limited degree, regulated by state laws, which stipulate such requirements as articles of incorporation, by-laws and the wording or nature of non distribution constraints. Together, these form the basic constitution of self-governance for such organizations. Key to this are the previously mentioned non-distribution constraints prohibiting distributions of "profits" or operating surpluses to owners or shareholders. Another standard legal provision required by most state statutes is for the nonprofit articles of incorporation to contain explicit language - a dissolution of assets clause - specifying what is to be done with any remaining assets in the event of the demise of the organization. For example, they may mandate that any remaining assets may only be transferred to another nonprofit corporation with a similar purpose, or simply specify that any remainder will be distributed by a specified court.

The reasons for this membrane are straightforward: Otherwise, it would be easy for an unscrupulous person or persons to solicit funds - whether membership dues, grants, donations or fees for some charitable purpose, and then to merely declare the money collected as profits to be paid to themselves. Or, they might simply terminate the organization and pocket the proceeds. While the vast majority of nonprofit organizations are open, honest operations, each year state charity and corporation officials in various states must deal with a number of such unscrupulous operations. And the three elements of the membrane are the primary tools which they rely on.

Types of Nonprofit Corporation and Policy

Under the U.S. system, nonprofit corporations in general are creations of state government but most of the important distinctions between different types of nonprofits are vested in the Internal Revenue Service (IRS) tax code, specifically Section 501(c), where nearly two dozen different types of nonprofit corporation are named and identified. All of the current categories are listed and identified on the Related Articles page of this article. The largest, and in many ways, most important category are the charitable and philanthropic entities recognized under Section 501(c)3 as both exempt from federal taxation and eligible to accept tax-deductible donations.

Seven distinct types of membership associations or clubs are the focus of separate parts of Section 501(c): Legal services corporations (501(c)20's) have already mentioned. In addition, Section 501(c)5 deals with labor, agricultural or horticultural associations. Section 501(c)6 is concerned with business associations and leagues (e.g. Chambers of Commerce). Social and recreational clubs (e.g., Senior Citizen's Centers not organized under Section 501(c)3) are the subject of Section 501(c)7. Because of the serious tax advantages of (c)3's at the present time, the number of (c)7 organizations has been shrinking for a number of years. Section 501(c)10 specifies domestic fraternal societies, orders and associations, a category of great importance on college and university campuses today, but once highly important earlier in the 20th century for community level fraternal societies as well. Section 501(c)19 specifies veterans' organizations, a portion of which operate bar and grill enterprises serving their members. The final member of this group, Section 501(c)13, are member-based cemetery associations.

Four distinct separate types of 501(c) corporations concerned with different forms of nonprofit insurance companies are identified in the U.S. federal tax code: 501(c)21 Black Lung Trusts have already been noted above. 501(c)12 corporations are nonprofit benevolent life insurance associations “of a purely local character”. Mutual insurance companies are identified in Section 501(c)15. And, private unemployment insurance supplemental to federal unemployment benefits provided by nonprofit corporations is the subject of 501(c)17.

There are also two beneficiary (or "mutual benefit") associations on the IRS list; Section 501(c)8 corporations are labeled fraternal beneficiary societies or associations and Section 501(c)9's are voluntary employees’ beneficiary associations.

The numbered sections Section 501(c)14 and Section 501(c)16 are currently unlisted. It is well to remember that the listed types of exempt corporations is established by the IRS for the primary purpose of developing and managing the rules and boundaries of exemption from federal taxation and not for the taxonomic purpose of defining or classifying the range of nonprofit entities.

Legal Doctrines, Qualifiers and Other Considerations

One important point to note is that the nonprofit corporation model of state law and model nonprofit corporation statutes, with required mission statements, non-distribution constraints, disposition of assets clause and exemptions from federal (and by extension, state and local taxes) does not in any sense also define a structural model of nonprofit organization in the ordinary sense. Instead, it is primarily a financial model defining the structure and governance or control of nonprofit [assets]. No specific internal organization structure is required or necessary and, in particular, no bureaucratic or formal organizational offices are specified. The only necessary offices identified in the typical nonprofit incorporation are officers of the corporation who are legally defined as managers of the affairs of the corporation. President (or Chairperson), Vice President (or Vice Chair), Secretary and Treasurer (or the two offices combined in a Secretary-Treasurer) are perhaps the most common officers defined in nonprofit corporate Articles of Incorporation, along with perhaps the total number of original members of the board. Older nonprofits used to regularly specify additional officers like Sargeant at Arms but this is rare today. The number of members of the board, schedule of board meetings, and other operational details may instead be specified in a supplementary document of operation rules usually termed the by-laws

A long-standing problem for nonprofit corporations, and foundations in particular is what to do with the remaining corporate assets of an incorporated foundation or association whose purpose has expired or is no longer relevant. Think of this as the "manufacturing buggy whips" question, or the "newsboys' orphanage problem"; both name issues that are no longer important or relevant. In such cases, the assets of such obsolete corporations may be literally out of reach; unspendable within its acceptable legal parameters. In such cases, the IRS and state charities and corporation officials have long been guided by the cy pres doctrine which allows generally for courts or public officials to agree to adjusting the corporations mission appropriately. Thus, the mission of training unemployed workers to manufacture buggy whips might be adjusted to training workers in the manufacture of carbon-neutral vehicles. Or, the newsboy's orphanage might be redefined as a gender-neutral shelter for homeless children.