Non-Profit Organizations Explained

A non-profit's mission is to further a public good that benefits society. Investors and private citizens make charitable donations to fund non-profits not for a return on investment but for the benefits they hope to see provided to others in need. Running a non-profit is a noble venture, but it can be difficult, especially if you're new to the space.

Whether you're readying the launch of your non-profit or in the middle of discovery, use this blog to learn about various non-profit entities, the formation process, and the challenges these organizations face. 

What is a non-profit business entity?

Non-profit business entities are organizations that do not operate for profit. Instead of focusing on producing profit for shareholders, the money earned by a non-profit is used for paying staff, supporting business operations, and promoting the public good. Broadly speaking, this is what qualifies as a non-profit.

Legal non-profit status makes those organizations tax-exempt. Social service agencies, churches, philanthropic foundations, public schools, charities, and museums illustrate the diversity of non-profits. While there are different categories of non-profits with specific restrictions, all non-profits must follow rigid rules governing their organization and management, which helps to ensure they're politically nonpartisan.   

Non-profits enjoy a status that exempts them from federal income taxes and most state taxes. This also means most donations an individual or business makes to a non-profit can also be claimed as a deduction on their tax return. 

Non-profits must prove they're worthy of public trust to qualify for tax-exempt status. They must file their taxes as a non-profit and submit annual informational returns about their finances. 

Different types of non-profit business entities

There are many types of non-profit organizations, with the most common non-profit business structure being a 501(c)(3), which includes most charitable organizations, foundations, and beneficiary organizations. Other common types of non-profits include: 

501(c)(1): Corporations organized by the federal government to serve a public purpose. 

501(c)(4): Labor unions and other employee associations that promote employee welfare.

Beneficiary associations falling under 501(c)(11) or 501(c)(12).

The process of forming a non-profit organization

Use this as your step-by-step guide to starting a business and applying for non-profit status. 

1. Research Your Issue and the Needs of Your Area

What is the need you’re trying to address? Find out what the problem is and study the issue. What are the root causes? Are there other organizations in your area doing similar work? You want to understand the subject well enough to make a difference.

You also want to avoid duplicate efforts if someone else already meets your area's needs. 

2. Develop a Business Plan

What will your non-profit do, and what will it be called? How exactly will you fulfill your purpose, and how will you raise funds? 

Your business plan should reflect the wealth of research you’ve conducted. You want to show grant providers and investors that you have the passion and understanding to make good use of their funds to make a difference. 

3. Recruit a Board of Directors

As a publicly-owned organization, your non-profit will need a volunteer board of directors to oversee management and help with long-term decisions and planning. The board should comprise people who care about the social issue and the non-profit’s mission. 

Ideally, your board should include community leaders from the area and members of the organization’s affected target population.   

4. File Articles of Incorporation

Now that you’ve drafted your initial plan, you can prepare and file your paperwork and begin operating. 

You may need to file articles of incorporation and pay a paperwork fee in every state you plan to operate in. You’ll only need to file with one state for most non-profits concerned with a single area. 

5. Request 501(c)(3) Status

Follow the IRS 501(c)(3) non-profit application process and apply with the accompanying fee. Without it, you won't be able to solicit donations or qualify for tax-exempt purchases. 

Funding for non-profits 

While numerous avenues exist to gain financial support, the two most common ways non-profits receive funding are through grants and charitable donations. Whichever you choose to pursue, there's a lot of work involved.

You'll have to research the various grants offered by governments, corporations, and foundations to identify those relevant to your non-profit. Grant applications often ask for a lot of information and may have requirements your non-profit has yet to meet.  

Charitable donations can be secured in a variety of ways. You could approach members of your community individually who are aligned with your vision, throw a fundraising event, or network with relevant donor organizations. 

Fundraising can be a full-time job and require someone extroverted to gain support, especially early on as your non-profit develops.

Benefits of tax-exempt status

The tax-exempt status of your non-profit is critical, and it can be a catastrophic blow if revoked. Without this status, your non-profit must pay taxes on donations, while donors can no longer write off contributions. Losing tax-exempt status will also close the door to future grants and donations.

Luckily, it isn't difficult to maintain non-profit, tax-exempt status when you adhere to the following: 

The non-profit must operate exclusively for exempt purposes as described in the IRS code. These can be charitable, religious, educational, scientific, literary, or other causes concerned with public safety.

Non-profits cannot advocate for or against specific political candidates. 

Non-profits cannot contribute to political campaigns.

Non-profits cannot benefit from private interests, and private shareholders should collect no part of their earnings.  

Challenges and considerations in running a non-profit organization

There are numerous challenges facing non-profit companies, with staying organized and maintaining healthy funding levels being the most complex and persistent.

Thousands of non-profits are vying for grants and donor dollars, with more mature organizations hiring dedicated personnel to go after and secure funding. Due to the intense competition, your non-profit can do everything right and still walk away empty-handed. While there's no secret recipe to securing the funding your non-profit needs, being persistent and ensuring paperwork and other areas of scrutiny are engaging, and error-free helps.

Keeping your records organized and financial statements accurate is a difficult challenge for non-profits. Prospective donors, the public, and the media will scrutinize these materials, so your ducks must be in a row. A lack of organization is usually a sign of a troubled non-profit, which more experienced donors will notice immediately and avoid.  

Partner with non-profit accounting professionals

Running a non-profit organization is a wonderful societal good and helps people who are in need. But you can't do it all on your own. Whether you need to know how to start a non-profit organization or require help completing a 501(c)(3) tax-exempt form, the non-profit experts at 1-800Accountant, America's leading virtual accounting firm for small businesses, can help. 

Whether it's non-profit taxes, tax advisory, or any of our professional accounting services, we have the affordable solution you need to help your non-profit stay compliant. Schedule a quick consultation – usually 30 minutes or less – to learn how we can help.