Introducing Corporations:

Nonprofit versus For-Profit

A corporation is a formal organization with a charter (a written document

that creates an organizational entity such as a nonprofit group or a for-profit

company). A nonprofit corporation may also have a governmental tax-exempt

status — which means that the corporation doesn’t have to pay federal and

state or provincial taxes on money left after all expenses have been met.

All types of corporations are legally established entities within political juris-

dictions such as a state, province, or national government. The key differ-

ence separating a nonprofit corporation from a for-profit corporation is that

distribution of profits gained by nonprofit corporations to members of those

corporations is prohibited. Instead of being paid out, profits must be retained

by nonprofit corporations and used strictly for financing further production

of the services that the group was founded to provide.

The nonprofit may use its profits to hire paid staff (see Chapter 13). These

people are not members of the organization — they’re employees. (Members

of a nonprofit are the people responsible for directing the organization — the

board of directors or trustees — and other volunteers, who may not be paid

by it; see Chapter 8.) Otherwise, nonprofit corporations are similar to for-

profit corporations.

 There are four main types of corporations:

 ✓ Nonprofit corporations: These corporations are unable to distribute

profits to members — that is, to its directors (see “Identifying and

recruiting directors and trustees,” later in this chapter). They can earn

money; they just have to reinvest it back into the organization. But

employees of the nonprofit are paid, just as are employees of busi-

nesses, but then they are not members of the corporation.

 ✓ General corporations: This is the most common corporate structure. The

general corporation is a separate legal entity owned by stockholders, who

are protected from the creditors of the business. A stockholder’s personal

liability is usually limited to the amount the person has invested in the

corporation. General corporations are large-scale organizations.

 ✓ Close corporation: The close corporation tends to be limited to, say, 30

to 50 stockholders. The close corporation is well suited for one or more

owners of a small corporation, usually a small business, only some of

whom will actively manage it.

 ✓ Limited liability company: In this type of corporation, the owners’ per-

sonal assets are protected from the corporation’s liability for business

debts. The owners may also benefit from the tax advantages of corpo-

rate partnerships.