Benefit corporations and non-profit corporations are both incorporated entities that could be formed by people looking to pursue a charitable cause. However, there a number of differences between benefit corporations and non-profit corporations that should be taken into account by anyone considering forming one or the other.
Here is a summary of five significant differences:
1. Ownership
A benefit corporation is owned by shareholders who contribute money, property or services and receive shares in return. The shareholders expect to profit from their investment through the issuance of dividends or the appreciation in value of their shares.
A non-profit corporation formed for a charitable purpose does not have owners. People giving it money are giving a gift and do not expect to profit from their contribution.
2. Distribution of corporate profits
A benefit corporation can distribute its profits to its shareholders in the form of dividends. A non-profit corporation has to use its profits to further its charitable purpose.
3. Directors’ duties
A benefit corporation’s directors, in making decisions and discharging their duties, must take into account various factors, such as whether they are furthering a general public benefit, as well as the impact of their decision on their shareholders, employees, community, and the environment.
A non-profit corporation’s directors’ duties are more limited. They have to manage the corporation to fulfill its charitable purpose.
4. Funding
A benefit corporation obtains capital like any other for-profit corporation. It could sell shares or bonds, borrow from banks or other private or government lenders, look for venture capitalists or other individuals looking for investments, etc.
A non-profit corporation receives funds via donations, government or private grants, and other fundraising activities.
5. Taxation
Like other for-profit corporations, if a benefit corporation is taxed as a C corporation it is subject to federal income tax at the corporate level. Its shareholders are subject to income taxes on profits distributed to them. If it is eligible for, and chooses S corporation taxation, the corporation’s income will pass through to shareholders.
A non-profit corporation that has a charitable purpose is eligible to apply for Sec. 501(c)(3) federal tax-exempt status. Contributions made to Sec. 501(c)(3) non-profit corporations may qualify as tax deductible to the person making the contribution.
To sum up, both benefit corporations and non-profit corporations can serve charitable ends. But as business entities they are very different. Anyone seeking to promote a charitable cause should obtain legal and tax advice before deciding on their vehicle of choice to fulfill their goals.
For further information on forming a non-profit corporation or a benefit corporation contact us or see:
For additional information on differences among types of business entities, see:
