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What Is A Nonprofit Organization? (Everything To Know About NPOs)

Author: Adie M.

Nonprofit organizations (or NPOs) are sometimes quite difficult to grasp. There are so many organizations, foundations, and charities out there that the words can become quite confusing.

To be able to start an NPO, you first need to know, what is a nonprofit organization exactly? 

In this blog post, we’ll be explaining everything you need to know about NPOs. This includes what they are, the reasons they exist, and the benefits of running one. We’ll also answer some FAQs about nonprofit organizations to give you a better understanding of how they work.

What Is A Nonprofit Organization? The Definition 

Before we delve into all the nitty-gritties of what makes a nonprofit organization tick, let’s discuss what “nonprofit” even means. 

Nonprofit is the word used to describe an organization that does not operate to make a profit, but instead operates to further a social cause. As such, any money that this organization manages to make or raise is put towards attaining the goal or mission that this organization has.  

Not every nonprofit organization has a goal that benefits the general public. For example, a members-only homeowners association may be nonprofit, but all money that is made or raised is for the benefit of the members. However, most nonprofits are charities, which means they do serve some sort of philanthropic cause.

What you need to know about the word “nonprofit”, then, is that it refers to an organization that operates exclusively for charitable, scientific, public safety, or religious purposes. They aren’t always charities. 

NPOs are tax-exempt under subsection 501(c) of the Internal Revenue Services tax code.

To find out the differences between a nonprofit organization and an NGO, read this article

The Reasons For NPOs

So, as we can see, there is no one reason for a nonprofit organization to operate. Below are just some of the many different types of NPOs, what they are filed under, and what they operate for:

  • The reason for 501(c)(3) organizations is to “operate for religious, charitable, scientific, literary or educational purposes”. Examples include churches or animal welfare societies.
  • 501(c)(4) NPOs are there to promote “community welfare; charitable, educational, or recreational”. For example, a civic league would file under this.
  • Then there are 501(c)(5) nonprofit organizations. These are labor, agricultural, and horticultural organizations that are “educational or instructive”.
  • An example of a 501(c)(6) nonprofit is a chamber of commerce. These organizations are there for the “improvement of business conditions of one or more lines of business”.
  • There are also 501(c)(7) NPOs that operate for pleasure or recreation. Examples of these are social and recreational clubs.

These are just some of the many different types of nonprofits, the rest of which you can find here on the official IRS organization reference chart. This is a really handy chart to use if you are not sure if the organization you are about to start is eligible for nonprofit and therefore tax-exempt status.

Happy team leading an NPO

The Benefits Of Running An NPO

Of course, one of the biggest benefits of running an NPO is that you can apply for and achieve tax-exempt status. This means that all money raised can go towards furthering your cause, whatever it may be. 

In order to keep tax-exempt status, regular reporting is essential. Any money that is left over after fundraising efforts and staff compensation must be cycled back into the organization and used for further efforts. The main point is not to make a profit. It is to achieve a goal or mission that benefits others.

Frequently Asked Questions

1. How does a CEO of a nonprofit get paid?

This question often comes up. The key thing that you need to remember when understanding this is that, of course, fair compensation for work done is essential. Many people dedicate all of their time to working for or running a nonprofit. So, fair salaries and benefits are part and parcel of hard work done.

However, this compensation is different from salaries for people who work for organizations who aim to make a profit. The difference is that the salary should be “reasonable, fair, and not excessive”. CEOs, in particular, will have a salary that is decided upon by the nonprofit’s executive board.

The thing that needs to be achieved is this: the large majority of the NPO’s earnings must go towards the mission of the organization. 

2. What is the difference between a nonprofit and a charity?

The first thing you need to know is that all charities are nonprofits, but not all nonprofits are charities. NPO is the overarching term, and a charity is a type of NPO. 

A nonprofit organization may operate for any of the reasons mentioned in this post, but a charity only operates for one of these reasons: for charitable purposes. 

If you are running a charity, you will file under 501(c)(3). If your NPO is not a charity, it will fall underneath any of the other 501(c) criteria.

3. How to start a nonprofit organization?

This is not an easy feat by any means. You will need to make sure that all of your paperwork is in order and has been accepted before you can even start to raise money. 

When you do have your tax-exempt status, there are loads of tips and tricks on our blog on how to keep your NPO going. 

You can learn how to fundraise and even some great fundraising strategies on our blog. 

Team of people running an NPO

Final Thoughts

In this blog post we have covered exactly what a nonprofit organization is, the different types of nonprofit organizations, and we’ve put you in the right direction when it comes to starting one. 

No matter what kind of nonprofit you are thinking of starting, using the perks of the internet is often key to successful marketing and fundraising. 

BiddingOwl can offer you a great option for raising your charity funds and building up your nonprofit organization. We provide free online auction software, so take a look at our website to see if this is the right decision for you!