By Tom Pedreira

The reasons for forming a non-profit corporation can be as varied as the types of activities that can be defined as "not for profit." 

A charitable endeavor is an obvious example of a non-profit purpose.  Other examples would include religious organizations, trade associations, social clubs, conservation groups and any number of associations formed for public or educational purposes. 

A key concept to understand when talking about non-profit endeavors is that forming a non-profit corporation does not automatically make the corporate entity exempt from taxation.  To the contrary, a non-profit corporation will be subject to paying corporate taxes unless or until it applies for and is granted "tax-exempt" status under federal law and under any state law that may be applicable. 

Forming a non-profit corporation is usually the easy part.  It generally entails filing articles of incorporation under applicable state law.  Prior to taking this step, though, thought should be given as to how and whether the organization will apply for tax-exempt status. 

Under federal law, for example, Internal Revenue Code section 501(c) provides for at least 28 different categories of non-profit organizations that can apply for tax-exempt status.  The best known category is for public charities under Internal Revenue Code section 501(c)(3), which reads as follows:
 
(c) List of exempt organizations

 The following organizations are referred to in subsection (a):    . . .
       
        (3) Corporations, and any community chest, fund, or foundation,
    organized and operated exclusively for religious, charitable,
    scientific, testing for public safety, literary, or educational
    purposes, or to foster national or international amateur sports
    competition (but only if no part of its activities involve the
    provision of athletic facilities or equipment), or for the
    prevention of cruelty to children or animals, no part of the net
    earnings of which inures to the benefit of any private shareholder
    or individual, no substantial part of the activities of which is
    carrying on propaganda, or otherwise attempting, to influence
    legislation (except as otherwise provided in subsection (h)), and
    which does not participate in, or intervene in (including the
    publishing or distributing of statements), any political campaign on
    behalf of (or in opposition to) any candidate for public office.

 Applications for tax-exempt status can be found on the IRS Web site.  Form 1023 is the application for tax-exempt status under section 501(c)(3).
 
The application process can be a rigorous one.  As reflected by the online application materials, the information requested can be detailed and extensive.  The IRS will also review the applications carefully in order to assure that a non-profit corporation is properly organized and that its operations will be consistent with a tax-exempt status.
 
One of the primary considerations with respect to public charities is that there will not be any issues of "private inurement."  According to the IRS Web site:

A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.

Another important concept to understand with respect to non-profit corporations is that even though an organization may be tax-exempt, this does not necessarily mean that contributions to the organization are going to be tax-deductible as a charitable donation.  Generally, it is only contributions to a public charity with tax-exempt status under 501(c)(3) that are tax-deductible as a charitable contribution.
 
Interestingly, there may be circumstances where it makes sense to incorporate as a non-profit entity even if tax-exempt status is not a consideration.  There may be nothing inappropriate, for example, with forming a business as a non-profit corporation so long as it is understood that the entity may be subject to corporate taxation, along with other limitations such as the inability to have stockholders.
 
In the final analysis, forming a non-profit corporation can be a complicated process and it deserves careful planning with the assistance of an attorney.