Business Entities: What is a Nonprofit?

June 28, 2021
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Every business has some kind of mission or purpose, whether it’s a need they’re trying to meet or a niche they want to fill. A strong business plan should lay out the vision and goals for the company. Different purposes require different strategies and structures for fulfilling them. 

A regular business works by generating profit for the owners and shareholders that made the business possible. The shareholders invested their own resources so that the business could fulfill its purpose, and they receive profit as compensation and reward for that investment. 

Nonprofit businesses, on the other hand, work a little differently. The mission or purpose is concerned with some kind of public good that is meant to benefit everyone. 

Investors help fund nonprofits, not for the benefits they hope to receive in the form of profit, but for the benefits they hope to see provided for society at large. Here are some things you should know about nonprofits: 

What is a Nonprofit?

Most charitable work that happens will have a nonprofit organization involved in some way or another. While for-profit companies may also engage in philanthropy and charity, the promotion of the public good is supposed to be the primary work of any nonprofit.

At its most basic, a nonprofit is simply an organization that does not operate for profit, just as the title suggests. Instead of producing profit for shareholders, the money earned by a nonprofit should be entirely used for paying staff, supporting business operations, and promoting the public good. 

Legal nonprofit status also makes the organization tax-exempt. However, there are many different kinds of nonprofits with various purposes and organizing structures. 

Social service agencies, churches, philanthropic foundations, charities, public schools, charities, and museums are all common examples of nonprofits. While there are many different categories of nonprofits with various restrictions, all nonprofits must follow rigid rules governing their organization and management and ensuring they remain politically nonpartisan.    

Nonprofit Definition

The most significant advantage of nonprofit status is the exemption from federal income taxes and most state taxes. This also means that most donations an individual or business makes to a nonprofit can also be claimed as a deduction on their tax return. 

To qualify for tax-exempt status, nonprofits must prove they are worthy of the public trust. They must file as a nonprofit and submit annual informational returns about their finances. 

Different Types of Nonprofit Organizations

Legally speaking, there are many types of nonprofit organizations, as outlined in section 501(c) of the IRS code. Still, the most common may be 501(c)(3) organizations, which include most charitable organizations, foundations, and beneficiary organizations. Here are some other common types of nonprofit: 

  • 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). 

Differences Between Public Charities and Foundations

Public charities and foundations are probably the two most visible kinds of nonprofit organizations, and they are both 501(c)(3) organizations. Every organization that applies for 501(c)(3) tax-exempt status is established as a private foundation by default, until or unless it is shown to qualify as a public charity for a specific purpose. 

The main difference is in how the organization receives its funding. Private foundations are nonprofits that primarily derive their funding from a business or individual. These organizations often provide grant funding for other nonprofits out of a larger reserve of funding. 

On the other hand, public charities use publicly collected funds to support their initiatives. They have a clearly articulated charitable purpose for their operations, and they use funding from grants, individual donors, and more to fund those operations and pay their employees. 

Qualifications for Being a Nonprofit

A nonprofit can lose their tax-exempt status if they are found not to be following any of these restrictions: 

  • The nonprofit 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.
  • Nonprofits cannot advocate for or against specific political candidates. 
  • Nonprofits cannot contribute to political campaigns
  • Nonprofits cannot benefit private interests, and private shareholders should collect no part of earnings.  

What Does a Nonprofit Do?

A nonprofit organization will operate from day to day just like any other business. They may use volunteers, but they also have management and employees who work each day to carry the business forward. 

Unlike for-profit businesses, however, nonprofits are working first and foremost to serve the public and the greater social good. The specific work of an individual nonprofit varies as widely as the work of for-profit companies. 

What’s the Difference Between a Nonprofit and a Charity?

Charity and nonprofit are overlapping categories. The difference between a nonprofit and a charity is that charity usually refers to a particular kind of nonprofit. 

Charities, generally understood, are nonprofit organizations that aim to improve the quality of life in their communities. They may target a specific issue or marginalized population, but their work is meant to strengthen society for everyone. 

Other nonprofits include many hospitals, schools, universities, churches, and professional associations.  

How is a Nonprofit Different Than a For-Profit?

Nonprofits are concerned primarily with public social good, whereas for-profit businesses aren’t limited in the same way. Nonprofits are publicly owned, which means that no private shareholder will directly benefit financially from its success. Money that is earned goes back into the work of the nonprofit. 

For-profit businesses, on the other hand, will directly accumulate profit for their shareholders. Both nonprofits and for-profits may sell products, earn revenue, and pay their employees, but the difference has to do with the purpose of the work and where the excess revenue goes. 

How Do I Start a Nonprofit?

Here’s a simple step-by-step guide to starting a business and applying for nonprofit 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 their other organizations in your area doing similar work? You want to make sure you understand the issue well enough to be able to make a difference.

You also don’t want to duplicate effort if someone else is already meeting the need in your area. Remember, the goal is not to make your business a success but to promote the public good. Other nonprofits should be your partners, not your rivals. 

2. Develop a Business Plan

Now it’s time to flesh out your idea. What will your nonprofit do, and what will it be called? How exactly will you fulfill your purpose, and how will you raise the funds you need? 

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

3. Recruit a Board of Directors

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

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

4. File Articles of Incorporation

Now that you’ve got your initial plan and your leadership, you can prepare and file your paperwork and begin operation. 

You may need to file articles of incorporation and pay a paperwork fee in every state you plan to operate in. For most nonprofits concerned with only a local area, you’ll only need to file with one state. 

5. Request 501(c)(3) Status

Before you start soliciting donations or asking for tax exemptions on your purchases, you’ll need to take one more step to cement your nonprofit status. Follow the IRS 501(c)(3) nonprofit application process and submit an application with the accompanying fee. 

Working with an accountant throughout this process can make everything go more smoothly. Improper filing or paperwork mistakes can delay the process or leave you with unexpected fees and penalties if you don’t get your company properly recognized as tax-exempt. 

Ready to Start a Business?

Don’t let yourself be intimidated by the process and all the paperwork it requires. If you have a vision for a nonprofit and a passion to serve your community, you can’t let bureaucracy get in your way. 

Keep your vision clear in your mind, and find people that can help you make it a reality. If you want to start your business quickly and confidently, you can partner with the professionals at 1800Accountant. We want to help pave the way and help you do the work you’re called to do. 

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.