What Does Nonprofit Mean?
A nonprofit organization is a company that works to serve a public purpose, not to make a profit for its owners or stockholders. So, what is the difference between a nonprofit and not for profit organization?
Under U.S. law, a nonprofit organization can apply to the IRS for “nonprofit” status, which usually comes with exemption from paying tax and the ability to accept tax-deductible donations from individuals, companies, and other organizations. Meanwhile, a not for profit organization is considered a recreational organization because it does operate to earn revenue.
There are many different types of nonprofit organizations, each with benefits and drawbacks. For this article, we’ll focus on private nonprofits, as opposed to public nonprofit agencies operated by the government.
What are the Different Types of Nonprofits?
There are different types of nonprofits all over the world. But what does nonprofit mean in the United States? The IRS has designated 27 different types of nonprofit, tax-exempt organizations. The most common types fall under the 501(c)(3) category, including:
- Charitable organization
If you’re wondering, “can an LLC be a nonprofit,” then the answer to this question is a yes. However, you will have to comply with numerous requirements to get nonprofit status and get a non profit EIN number.
The Big Difference: Taxation
Tax exempt status is one of the main benefits of nonprofits organized for the public good. Charitable nonprofits don’t pay any federal income tax on donations or other revenue sources, so more money can go directly to support the nonprofit’s mission.
A nonprofit has to apply to the government for tax exempt status under Section 501(c)(3) of the Internal Revenue Code and, after being approved, file a return with the IRS each year. Nonprofits can keep their tax exempt status forever, as long as they do not change their purpose.
Tax exempt status offers multiple benefits, including:
- Income tax exemption – A 501(c)(3) designation means you do not have to pay federal income taxes.
- Property tax exemption – All 50 states grant property tax exemption to organizations that qualify for federal tax exempt status, although there may be additional requirements or regulations at the state level.
- Tax deductible donations – Contributions to a 501(c)(3) organization are tax deductible for individual and corporate donors. This is a significant tax benefit to attract donors.
Tax exempt status under the IRS comes with strict rules depending on the exact nonprofit classification. These rules are generally related to:
- Supporting or opposing political movements, campaigns, or legislation
- Engaging in lobbying activities
- Advocating any particular religion
Other Benefits of Nonprofit Organization
While the successful accomplishment of a mission is the primary benefit of being a nonprofit organization, there are many other pros to keep in mind when considering this type of business structure. Here are some of the top benefits:
Nonprofit Benefit #1: Funding Sources
Nonprofits have access to a range of revenue sources that are closed to for-profit companies, including:
- Government and institutional grants
- Cash donations from individuals, private foundation, or corporations
- In-kind donations of products or services
- Donations as part of estate planning
Having these resources at their disposal give a nonprofit organization a huge advantage over their for-profit counterparts.
Nonprofit Benefit #2: Staffing
Another benefit is the ability to attract and maintain a purpose-driven workforce.
Employees often seek out jobs in the nonprofit sector because they prioritize values or mission over income. This can equal employees who will be more dedicated and efficient, and potentially boost employee retention.
Nonprofit Benefit #3: Lack of Motive Conflict
The most straightforward answer to “what does it mean to be non profit” is simply the absence of profit motivation. For-profit organizations have a fiscal responsibility to their shareholders to maximize profit. This can be at odds with any other organizational mission.
While for-profit corporations can and do support values related to environmental impact, employee satisfaction, and community benefit, these have to be weighed and negotiated against that ultimate responsibility to stockholders.
What Is the Downside to Being a Nonprofit Organization?
While the satisfaction of working toward a mission and hopefully helping people and communities is a great motivator, there are some definite cons.
Nonprofit Downside #1: Financial Instability
Nonprofit organizational budgets can ebb and flow, making it hard to stay on track with projects, plans, and hiring or retention of employees. This is due to factors including:
- Grant availability – Grants that you have come to depend on may no longer be available with little notice.
- Economy – Changes in the economy can lead to reduced donations.
- Politics and culture – Political swings can reduce government funding, and cultural shifts can change which types of organizations donors want to be associated with.
Nonprofit Downside #2: Public Relations
While you don’t have to answer to stockholders as a nonprofit, you do have to prove to donors that you are doing a good job stewarding their contributions through:
- Annual reports
- Donor events
- Social media and marketing
It also means showcasing a narrow overhead margin by keeping administrative and employee costs as low as possible.
Nonprofit Downside #3: Staffing
Employee attraction and retention is both a pro and a con for charitable nonprofits. While passion for the mission can attract employees, lower wages and benefits mean you may lose more experienced employees who need to grow their income to support a family or financial planning goals.
It may be difficult to attract employees with specific technical skills or backgrounds who gained that education or experience with an expectation of commensurate compensation.
Ready to Step into the World of Nonprofits?
By now, you should understand what a non profit organization is. There are significant benefits to being categorized or getting tax exempt nonprofit status, but all the decisions and options can be complicated to understand. The best way to approach the process is by breaking it into small steps and taking advantage of tools and tips that can help you. Simply fill out this form to apply for a nonprofit online right now.
UpCounsel. Types of Nonprofits: Everything You Need to Know. https://www.upcounsel.com/types-of-nonprofits
National Council of Nonprofits. What is a “Nonprofit”? https://www.councilofnonprofits.org/what-is-a-nonprofit
Small Business Chron. Do Nonprofit Organizations Pay Property Taxes? https://smallbusiness.chron.com/nonprofit-organizations-pay-property-taxes-61900.html
Vorys. Are 501(c)(3) Nonprofit Organizations Subject to Real Property Taxation? https://www.vorys.com/publications-2871.html
IRS. Charities and Nonprofits. https://www.irs.gov/charities-and-nonprofits
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