What is a Nonprofit Organization? – Overview
A nonprofit organization is any enterprise that has received tax-exempt status from the Internal Revenue Service (IRS). Nonprofit organizations are also called NPOs, or 501(c) (3) organizations, as per the tax code section that allows them to operate.
Nonprofit organizations are normally granted tax exemptions because they are engaged in furthering a social cause and benefitting the public substantially. Any donation to a nonprofit organization by an individual or business is usually tax-deductible.
Besides this, the nonprofit organization also does not need to pay any tax on the amount of donation received or any other money acquired through fundraising events.
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What is the Eligibility to Become a Nonprofit Organization?
Organizations that further scientific, educational, religious, charitable, public safety, cruelty-prevention and literary causes or purposes are granted nonprofit designation and receive tax-exempt status. Some common examples of nonprofit organizations are national charities, universities, hospitals, foundations and churches.
A nonprofit organization should substantially serve the public by offering goods, services or a combination of both. These organizations should also make operating and financial information public so the donors can be informed on how their contributions are utilized. Nonprofits can also collect donations for dispensing to other eligible charities.
However, the organization must first request 501(c)(3) status from the IRS before receiving the tax-exemption status. Once the organization is registered and begins operations, it must maintain compliance with the relevant state agency regulating charitable organizations. The organization may require a dedicated accounting team or a CIO to do this.
Political organizations are not granted nonprofit status, which is the reason that most organizations are actively non-partisan in their code and conduct. Any organization seeking nonprofit classification should state explicitly in their organization papers that they will not participate in any political campaign on behalf of any candidate or make any expenditure for political purposes.
How do Nonprofits Need to Operate?
While some nonprofit organizations rely solely on volunteers, most large and medium-sized nonprofits usually hire a staff that often includes full-time and full-paid directors, managers and other employees.
Though these organizations have special tax concessions in all aspects, nonprofits usually need to pay employment taxes and follow the state and federal labor and workplace regulations like any other business organization.
Nonprofit organizations are not prohibited from offering assets or income to people as fair compensation for their services. In reality, nonprofit organizations must be explicit in their commitment to not use the organization’s operations for the personal benefit or gain of the founders, employees, relatives, supporters or associates.
What is the Difference between Nonprofit and Not-for-profit Organizations?
Though the terms nonprofit and not-for-profit are used interchangeably, they actually define two distinct types of enterprises.
The main difference between the two is their purpose. As you know, nonprofit organizations are required to offer significant social benefits through their goods or services. On the other hand, not-for-profit organizations are not required to have any such commitments and can simply be formed to serve their members instead of the community at large.
The IRS’ 501(c) code sections also make further distinctions between nonprofit and not-for-profit organizations. For instance, nonprofits operate under section 501(c)(3) and cover corporations, foundations or funds that operate for charitable, religious, literary, scientific or educational purposes.
By contrast, not-for-profit organizations mainly do this under sections such as 501(c)(7), which is for recreational organizations. A common example of a not-for-profit organization is a sports club that is jointly owned by members and simply established for leisure activities.
Besides this, the code also sets different tax treatments for nonprofit and not-for-profit organizations. Generally, both types of organizations are tax-exempt, meaning that the income they earn is not taxed. However, donors who contribute to nonprofits are eligible for tax deductions on the donated amount from their taxable income.
Nonprofit organizations are those enterprises whose main purpose is to provide goods and services for advancing charitable, religious, scientific, literary, and socio-economic causes. These organizations need to work under strict rules which prohibit them nonprofits from any political act or contribution.