<aside> <img src="/icons/info-alternate_gray.svg" alt="/icons/info-alternate_gray.svg" width="40px" /> What is this about? Choosing the right business structure is the first step in registering your organization. There are five common types of business structure recognized by the IRS; nonprofits typically register as corporations.
What do I need to do? Understand the nonprofit corporation business structure, and associated constraints (like formation time and regulation).
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Further reading
Databases
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In the US, state and federal tax law for businesses are distinct. So, new organizations have to pay attention to both during formation.
What’s called a 501(c)3 nonprofit in the US sits at the intersection of a state concept (the corporation) and a federal tax status (the 501(c)3 status). So, a nonprofit that forms as a corporation will be referred to by both its state and federal status, e.g. “a Delaware nonprofit corporation with 501(c)3 status” or “a Delaware nonprofit corporation without 501(c)3 status”. The “Delaware nonprofit corporation” refers to the type of state-level entity it is, while the “501(c)3 status” refers to how the federal government treats it for taxes.
In the US, corporations are (generally) registered at the state-level. Most 501(c)3 and 501(c)4 nonprofits form as a corporation at the state-level. Most states have a specific corporation type for non-profits, typically called a “nonprofit corporation” or “exempt corporation.” Unless you’re considering starting a non-section 501(c) organization (such as a B corp or for-profit), you should likely form as a state-level exempt corporation.
Consulting with business counselors, attorneys, and accountants can prove helpful if you’re considering what structure to form.
Nonprofits typically register as corporations, so we’ll explore this business structure in more detail.
A corporation is a type of structure for multiple people to own a business together. A corporation differs from an LLC, the other common form of a multi-stakeholder business entity, in two crucial ways:
A corporation is more costly to set up and maintain than an LLC. But, it’s also a strong choice for an organization that intends to the contribute to the public good, through sub-types such as a B Corp or nonprofit.
The appropriate business structure for your organization will depend on a variety of considerations, and how you weigh them.
We’ve already seen how your choice of business structure affects ownership, liability (e.g. for business debts), and taxation. Now, it’s worth reflecting on your business plan, and further considerations, in order to narrow down the search space.
Having prepared your business plan, you may notice that elements of your business model make it more or less suitable for certain types of business structure.
For example:
Your cost structure might flag some expensive resources you need to acquire. Substantial fundraising might be required to secure those resources, which might be conducted through investments in a corporation, or perhaps tax-deductible donations to a 501(c)(3) nonprofit.
Your key activities might involve partisan political activity, which would not be suitable for a 501(c)(3) nonprofit — but could be suitable for a different type of nonprofit, like a 501(c)(4).
Your customer relationships may depend on a perception of contribution to the public. A business model with accountability for public goods, like a nonprofit or B corp — or a hybrid or nested structure including one or both — may therefore be useful.
Further considerations
You might also intend to create a nested or hybrid structure, combining multiple types of business in a higher-level arrangement.
These arrangements are far less common and can be more difficult to set up. If you're considering one of these non-standard structures, you should consult a lawyer to help you decide.
We suggest you take some time to figure out which business structure is right for your organization, taking into account these considerations, and how you weigh them.