When forming a nonprofit, it’s important to understand the differences between the various types of legal entities. A common misconception is that nonprofits can operate as S corporations or C corporations, but in reality, nonprofits are entirely different from these structures.
What Are S and C Corporations?
S and C corporations are for-profit entities created under state corporate law. The key difference between the two lies in how they are taxed:
C Corporation (C-Corp): A C corporation is taxed separately from its owners, leading to what is often referred to as “double taxation.” The corporation pays taxes on its profits, and shareholders are taxed on dividends.
S Corporation (S-Corp): An S corporation is a special tax designation that allows income to pass through directly to shareholders, avoiding double taxation. To qualify, an S-Corp must meet specific IRS criteria, including a limit on the number of shareholders.
While both S and C corporations are designed to generate profits for their shareholders, nonprofits are structured to serve public or social good rather than create profits for owners or investors.
Why Nonprofits Are Not Corporations in the Traditional Sense
Nonprofits are created with the mission of benefiting the public and are usually exempt from paying federal and state income taxes under Section 501(c) of the Internal Revenue Code. Unlike S or C corporations, nonprofits:
Do not have shareholders or owners. Any surplus revenue is reinvested into the organization’s mission rather than distributed as dividends.
Are mission-driven. A nonprofit's purpose is to serve a charitable, religious, educational, or scientific cause. Its success is measured by the impact it creates, not profits.
Enjoy tax-exempt status. Nonprofits can apply for tax-exempt status, allowing them to avoid federal income tax and receive tax-deductible donations. For-profit corporations do not enjoy these privileges.
The Legal Structure of Nonprofits
Nonprofits are most commonly structured as 501(c)(3) organizations, which is a federal tax-exempt designation. They may be incorporated as nonstock or nonprofit corporations at the state level, but they are fundamentally different from S and C corporations. While S and C corporations are subject to federal tax laws focused on profit distribution and shareholder returns, nonprofits are governed by strict guidelines about how revenue is used to support their mission.
Some nonprofits may also be set up as trusts or associations, but all nonprofit structures have this in common: they exist to serve a mission, not to generate profits for individuals.
What About Nonprofit Taxes?
Though nonprofits are exempt from paying federal income taxes, they must still adhere to strict IRS rules and reporting requirements. One of the most important forms is the IRS Form 990, which provides transparency about the organization’s finances and activities. Nonprofits may also be subject to state-level taxes, such as sales or property taxes, depending on local laws.
Conclusion
Unlike S or C corporations, nonprofits are mission-oriented and focused on serving the public good. They operate under a different set of rules and enjoy benefits like tax-exempt status because they prioritize charitable, educational, or religious goals over profit-making. Understanding the distinction between for-profit corporations and nonprofits is essential when establishing and managing a nonprofit organization.