What Is a Nonprofit?

Many business owners dream of starting their own company, but not all companies focus on making money. Some, called nonprofit corporations or organizations, work to support community and economic development. A nonprofit organization 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. Nonprofit organizations aim to improve the well-being of people and communities rather than make profits. They get support from sponsorships, initiatives, and other means.

This article provides a brief overview of nonprofit organizations in America.

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Key Takeaways:

• Nonprofits focus on serving the community and are typically mission-driven.
• 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.

What Is a Nonprofit Organization?

A nonprofit organization is a special type of business entity. It's created to help a cause or the public benefit. These groups might work in community development, advocacy, or other areas. Nonprofit organizations can take various legal forms, such as charitable organizations, foundations, associations, trusts, or social enterprises. The specific legal structure and requirements can vary depending on the country and jurisdiction in which the nonprofit operates.

While they can earn money, the money goes back into the group. This helps keep the organization running and funds its outreach programs. They often have a board of directors made up of board members who guide the nonprofit's actions.

Nonprofit vs. For-Profit Organizations

Business owners and entrepreneurs often wonder about the difference between nonprofit and for-profit companies. A for-profit business, like a startup created by small business owners, aims to make money. The Small Business Administration (SBA) offers support to these companies.

A nonprofit, on the other hand, works to help a cause. They don't pay taxes on most of the money they make, but they must use any profit for the organization's purpose. 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

When people hear “not-for-profit," they often think it's the same as “nonprofit," but there's a difference. Not-for-profit organizations, like nonprofits, don't aim to make money for business owners or board members. The main distinction lies in their goals and how they operate. Not-for-profits are typically activities that aren't organized for profit, like a hobby club or community sports team. They might collect money to cover costs, but they don't focus on wider public benefit causes.

On the other hand, nonprofit organizations are structured to serve larger community initiatives, outreach, or advocacy. They can have a broader impact and often aim for community or economic development. Nonprofits have a larger scope, structured management like a board of directors, and defined community goals. Not-for-profits are generally smaller and focus on group interests rather than broader public benefits.

Benefits of Forming a Nonprofit Organization

Forming a nonprofit comes with many advantages. First, they don't pay federal tax on money that goes towards their cause. 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 Internal Revenue Service (IRS). This is because they are exempt nonprofits.

Donations to them are often tax-deductible. This encourages people and businesses to support them. Nonprofits also get support from the SBA and can apply for grants. These funds can cover their operating costs and help them reach more people.

Another benefit of nonprofit status is limited liability. Nonprofit organizations offer limited liability protection to their board members and officers. This helps shield their personal assets from the organization's debts and liabilities. This benefit ensures that individuals involved in the nonprofit can focus on its mission without fearing personal finance repercussions.

Disadvantages of Forming a Nonprofit Organization

However, there are challenges, too. Nonprofits can't give profits to business owners or board members. They can't work as a regular business entity. If they do unrelated business, they might have to pay taxes. They also must show the public their tax return and other business plans. This means more people can see their actions or spending. 

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.

Forming a Nonprofit Organization

Starting a nonprofit is like launching any startup. Entrepreneurs need a clear business plan. You might wish to decide on the name of your nonprofit organization first. You will need to file articles of incorporation to have a nonprofit organization. There is a filing fee for the articles of incorporation. You will also need to decide on a registered agent for the organization. You'll need to register with the secretary of state in their area.

You must also follow rules to show they benefit the public. You need 501(c)(3) status to form a tax-exempt organization with the IRS. You will also need to have bylaws in place. Meeting these eligibility rules can be tough, but it's essential. For more information on forming a nonprofit organization, visit FindLaw's How to Form a Nonprofit page.

Changing Status as a Nonprofit Organization

Sometimes, nonprofits want to become for-profit companies. Changing this status is tricky, but it's possible. 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. Work with the secretary of state's office. Make sure you meet all of the rules for the new type of business.

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.