What Is a Nonprofit?

A nonprofit organization (NPO) is an organization that serves a general public interest. There could be a religious or educational purpose behind the business activities.

A nonprofit may have a public safety or a charitable interest. Nonprofits can also promote a social cause. Types of nonprofit organizations include public charities and social welfare organizations.

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Key Takeaways:

• Nonprofits focus on serving the community.
• Tax-exempt status under federal and state law and limited liability are benefits of having a nonprofit.
• There are several steps to forming a nonprofit organization.

Understanding Nonprofits

If you're thinking about starting a nonprofit, you might want to know what it means to run one. How is a nonprofit different from a for-profit organization? Is a nonprofit different from a not-for-profit organization?

Nonprofit vs. For-Profit Organizations

Nonprofit businesses focus on helping the community. For-profit companies concentrate on getting profits. How do nonprofits keep running and stay in business?

Profits can be tax-exempt on the federal level and state level with a nonprofit. So while a for-profit business pays income taxes, a nonprofit typically does not. Fundraising efforts can also help nonprofits keep running. Nonprofits can hire private individuals as paid staff.

Not-for-Profit Organizations

Is there a difference between a nonprofit and a not-for-profit organization? The nonprofit sector focuses on helping people. A not-for-profit organization does not have to serve the community. Individuals can form a not-for-profit organization to suit their interests.

Benefits of Forming a Nonprofit Organization

One benefit of running a nonprofit is tax exemption under the internal revenue code. If your nonprofit organization has 501(c)(3) status under the tax code, you may be able to avoid income tax when you file with the IRS (Internal Revenue Service).

Another benefit of nonprofit status is limited liability. Limitations on liability could help protect your personal assets if someone were to sue your nonprofit.

Forming a Nonprofit Organization

You might wish to decide on the name of your nonprofit organization first. You will also need to decide on a registered agent for the organization.

You will need to file articles of incorporation to have a nonprofit organization. There is a filing fee for the articles of incorporation.

You need 501(c)(3) status to form a tax-exempt organization with the IRS. You will also need to have bylaws in place.

Commonly Asked Questions

Are there disadvantages to forming a nonprofit organization?

Charitable organizations must follow the rules laid out by the government. Nonprofit organizations that are tax-exempt under 501(c)(3) are not allowed to campaign for candidates running for public office.

Can an organization change its status?

A legal entity can change its status. For example, a nonprofit organization may become a for-profit corporation. Forms must be filed to change the status of your organization with the appropriate government agency.

Need Help? Seek an Attorney

When you're researching a new business venture, questions often arise that can be difficult to answer. When you have a question that can only be answered with a background of legal knowledge, consider seeking the guidance and expertise of a small business attorney.

Related Resources

• How to Form a Nonprofit
• Overview: Nonprofit Benefits