Nonprofit Corporations vs. For-Profit Corporations

What is the difference between a nonprofit corporation and a regular for-profit corporation? Aside from the name, the two entities can be separated by other differences ranging from the way each is operated to various tax implications. Below, you’ll find an in-depth analysis of for-profit and nonprofit corporations. 

Shareholders vs. no shareholders

One of the primary differences between a nonprofit corporation and for-profit corporation is the fact that a for-profit corporation has shareholders, while a nonprofit is not permitted to have any shareholders. Because a nonprofit is formed for the benefit of others, no dividends can be distributed among members or shareholders. Any additional profit made must go to the cause and purpose for which the nonprofit organization was formed, reasonable salaries for employees, and to cover the necessary expenses of the nonprofit. With a for-profit corporation, the purpose of its formation is to benefit the owners and shareholders with dividends. This does not mean that all money made must go to support the cause of the nonprofit. It simply means that after the nonprofit has paid its bills and other obligations, any leftover money goes straight back into the organization, and not the private pocket of any individual.

Dissolution of the corporation

When it comes to the end of a corporation’s life, the fate of leftover assets differs between for-profit and nonprofit corporations. In a for-profit corporation, the assets may be divvied up and distributed among the shareholders after any additional debts and legal liabilities have been taken care of. The assets of a nonprofit, however, must be handled differently. They must be distributed out to another nonprofit or nonprofits, and not among members or individuals.

Taxes and nonprofit status

Most nonprofit organizations have the ability to become tax-exempt under a variety of IRS definitions, while for-profit corporations do not have that option. While nonprofits have the option to become tax exempt, this does not mean that they automatically fall under that status. A nonprofit corporation must apply with the IRS, as well as the state, to receive federal and state tax exemptions. If a nonprofit corporation is offering an excessive salary to any of its employees, it runs the risk of losing its tax-exempt status.

Charity registration

Another primary difference between nonprofit corporations and for-profit corporations is that because most nonprofit organizations (with the exception of mutual benefit nonprofits) will be soliciting donations from the public to help in part to aid the purpose for which they were formed. Because of this, these nonprofits must file for charity registration with the attorney general or similar state office in the state where they are formed or operate. Because for-profit companies do not receive funds in this way, there is no need for them to do any additional charity registration.

 

Nonprofit

For Profit

Can funds be distributed to individuals upon dissolution?

No

Yes

Are shareholders allowed?

 

No

Yes

Is it eligible for tax-exemption?

 

Yes

No

Is charity registration required?

 

Yes

No

 

About the Author

Drake Forester, Chief Legal Strategiest - Northwest Registered AgentDrake Forester is the chief legal strategist at Northwest Registered Agent, LLC. Throughout his career, Drake has researched many complicated nonprofit compliance issues and provided whitepaper and publications for many leading nonprofit organizations in the United States.