When one thinks of the term ‘business’, the first thought is to align it with profit. We often see businesses as working only towards increasing revenue or profit. Money becomes the central guide of this definition of business. There are, however, businesses that aren’t dedicated to making a profit.
These are entities that serve a social cause or exist to facilitate good in society. Although they may have motivations to boost their revenue, the aim is to champion chosen causes. Revenues become capital for supporting their social activism. To help their social efforts and maximize their limited funds, they receive tax exemptions and legal classification as nonprofits.
What Is A Nonprofit Organization?
Any business, even a for-profit one, can focus on serving the public or society in one way or another. This doesn’t necessarily make it a nonprofit organization.
A nonprofit institution is uniquely defined by the combination of its purpose and classification by the government. It is an organization that receives tax exemption from the Internal Revenue Service as an acknowledgment of its social work.
The tax exemption received by nonprofits applies to the business’ income. However, it may still have to account for other tax forms like employment taxes, sales, taxes, and more.
Some states offer further exemptions to nonprofits such as the removal of sales tax from items intended for business use.
In addition to exemptions, nonprofits can benefit tremendously from grant and fundraising funds. Members of the NPO also face no personal accountability for the entity’s debts or other liabilities.
Nonprofit Vs Not-for-profit
While these terms are often used interchangeably, they do not quite mean the same thing. What they have in common is that neither business form accrues profits for its founders or owners. Revenue gets funneled back into the organization.
The difference between nonprofits and not-for-profits lies in the intention or mission of the organization. Not-for-profits do not have to serve the public good. They can exist solely for the purpose of serving the use of a select group of people. This business format is commonly used by community clubs and sports teams.
IRS Legislation Defines Registered Nonprofits As Organizations That Comply With These Rules:
To receive tax-exempt status under section 501(c)(3), all types of nonprofits must meet the following requirements:
- Not hold political affiliations. Section 501(c)(3) of the Internal Revenue Code prohibits all applicable organizations “from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.” Nonprofits may not contribute to funding political campaigns or issue verbal or written public positions either for or in opposition to a political candidate. Violation of this rule could lead to the removal of an organization’s tax exemption.
- Serve an exempt purpose. The organization must exist and function to fulfill a social good or improve social welfare. This includes functions that are religious, educational, literary, fostering public safety, scientific, charitable, aim to stop abuse and cruelty to animals and children, and promote national or international amateur sports. These are the exempt purposes that qualify a nonprofit for exemption.
- Not operate for personal gain. Any revenue gathered by the organization may not be used for the gain of an owner, private member or shareholder, or other individuals in the organization. All revenue, operations, and activities of the organization must contribute to the identified mission or cause.
- Refrain from being an action organization. This is linked to the restriction on active political involvement. The organization may not actively try to effect legislative change as the primary part of its operations.
29 Types Of Nonprofits
Under the Internal Revenue Service’s definition of nonprofit organizations, there are 29 different types of NPOs:
- 501(c)(1): Corporations Organized under the Act of Congress (including Federal Credit Unions)
- 501(c)(2): Title Holding Corporation For Exempt Organization
- 501(c)(3): Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations
- 501(c)(4): Civic Leagues, Social Welfare Organizations, and Local Associations of Employees
- 501(c)(5): Labor, Agricultural, and Horticultural Organizations
- 501(c)(6): Business Leagues, Chambers of Commerce, Real Estate Boards, etc.
- 501(c)(7): Social and Recreational Clubs
- 501(c)(8): Fraternal Beneficiary Societies and Associations, if for certain Sec. 501(c)(3) purposes
- 501(c)(9): Voluntary Employees Beneficiary Associations
- 501(c)(10): Domestic Fraternal Societies and Associations
- 501(c)(11): Teachers' Retirement Fund Associations
- 501(c)(12): Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies, and Like Organizations
- 501(c)(13): Cemetery Companies
- 501(c)(14): State-Chartered Credit Unions, Mutual Reserve Funds
- 501(c)(15): Mutual Insurance Companies or Associations
- 501(c)(16): Cooperative Organizations to Finance Crop Operations
- 501(c)(17): Supplemental Unemployment Benefit Trusts
- 501(c)(18): Employee Funded Pension Trust (created before June 25, 1959)
- 501(c)(19): Post or Organization of Past or Present Members of the Armed Forces
- 501(c)(21): Black Lung Benefit Trusts
- 501(c)(22): Withdrawal Liability Payment Fund
- 501(c)(23): Veterans' Organization (created before 1880)
- 501(c)(25): Title Holding Corporations or Trusts with Multiple Parent Corporations
- 501(c)(26): State-Sponsored Organization Providing Health Coverage for High-Risk Individuals
- 501(c)(27): State-Sponsored Workers' Compensation Reinsurance Organization
- 501(c)(28): National Railroad Retirement Investment Trust
- 501(c)(29): CO-OP health insurance issuers
To find out more about the nature of each type of nonprofit organization, see pages 69-70 of the IRS Publication 557.
Conclusion
Running a nonprofit has its benefits. You can get tax exemptions, grant access, fundraising, and reduced personal liability. Most importantly, you get to do the work you want for your community or greater society.
It does, however, require extensive backup from a fantastic team, dedicated support for your cause, and more.
If you’re looking to start your own nonprofit, read this article next: How To Start A Nonprofit Organization.
