Astonishingly, one of the most frequent questions about forming a nonprofit comes from business owners who wonder if, since their business is not profitable, they can turn it into a nonprofit. Show
The term "nonprofit" leads to a vast misunderstanding of what charitable organizations do and the role they play in our society. It's not about having or not having a profit. What makes an organization a nonprofit has to do with purpose, ownership, and public support. Charitable nonprofits typically have these elements below.
In contrast, a for-profit business typically seeks to generate income for its founders and employees. Profits, made by sales of products or services, measure the success of for-profit companies, and those profits are shared with owners, employees, and shareholders. NoteThere are many types of nonprofits other than charitable ones, ranging from your local credit union to the Chamber of Commerce in your city. Some nonprofits depend on membership fees and sales of specific services or products. They all have IRS numbers starting with 501(c). Charitable nonprofits are designated as 501(c)(3) organizations. In 2015, there were approximately 1.56 million registered nonprofits in the US. That number included all organizations listed as 501(c). Most 501(c)(3) nonprofits provide a service, but some are foundations that make grants to other nonprofits to help them pursue their missions. The typical charitable nonprofit depends primarily on donations, grants, and mission-related earned income to fund its socially-oriented activities. The workforces of nonprofits and for-profit organizations also look different. Businesses employ paid staff, while nonprofits may have a workforce made up of both paid staff and volunteers. In fact, in many nonprofits, volunteers outnumber paid employees. Volunteers are more than just unpaid workers, however. Volunteers, especially those most loyal over time to the organization, often become the best donors. Volunteers thus serve two roles: Helping the organization with staffing and supporting the nonprofit through monetary contributions ranging from cash donations to bequests through their wills. Nevertheless, most charities must employ some professionals to work full or part-time to keep the place running. They typically have a professional leader, fundraising and marketing staff, business staff such as an accountant, and highly trained people to carry out programs, such as education, health services, and therapeutic services. Nonprofits may be exempt from federal taxes, and donors to charitable nonprofits may be able to deduct their contributions from federal taxes. In recent years, some hybrid business organizations have appeared that blur the lines between for-profit and nonprofit. Examples include B Corporations and businesses that have a social purpose. Traditional Charitable Nonprofit Organizations Share These Characteristics1. PurposeMany people think that nonprofit means that the organization cannot make a profit. That is a myth. To survive, nonprofit organizations, just like businesses, must make sure that the organization's revenues exceed its expenses. 2. OwnershipThe public owns a nonprofit organization. It belongs to no private person, and no one person controls the organization. The assets of a nonprofit are irrevocably dedicated to the charitable, educational, literary, scientific, or religious purposes of the organization. The cash, equipment, and other property of a nonprofit cannot be given to anyone or used for anyone's private benefit without fair market compensation to the nonprofit organization. A nonprofit's property is permanently dedicated to exempt purposes. When and if the organization dissolves, any remaining assets after debts and liabilities are satisfied, must go to another nonprofit organization—not to members of the former nonprofit or any other private individual. 3. ControlControl of an incorporated nonprofit lies with a governing board of directors or trustees. The responsibility of that board is to see that the organization fulfills its purpose. Board members do not act as individuals but must serve as a group. No one has permanent tenure on a board, and the board can, if necessary, fire an executive or remove board members. This means that no one, not even the founder of the organization, can control a nonprofit. Most nonprofit boards of directors are not compensated, except for expenses such as travel to and from board meetings. 4. AccountabilityNonprofit organizations are accountable to the public and must file annual information returns with the federal and state governments. The federal form that nonprofits must submit is IRS Form 990. The nonprofit must report information regarding its finances, including the salaries of the five highest-paid non-officer employees. IRS public disclosure requirements apply to all tax-exempt organizations. That involves making the nonprofit's three most recent Form 990 or 990-PF returns as well as related supporting documents available to the public. Most nonprofits make them available at their headquarters and on their websites. The tax forms are also easily obtained through services such as Guidestar. At the state level, nonprofits are usually overseen by the State's Attorney General's Office. That office commonly has the power to take a nonprofit corporation to court to make sure it complies with the law. Was this page helpful? Thanks for your feedback! Tell us why! Other SubmitSources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
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