Not for Profit

What Does Not for Profit Mean?

Not-for-profit organizations do not earn profits for their owners. All of the money earned by or donated to a not-for-profit organization is used in pursuing the organization’s objectives and keeping it running; income is not distributed to the group’s members, directors, or officers.

Typically, organizations in the nonprofit sector are tax-exempt charities or other types of public service organizations; as such, they are not required to pay most taxes. Some well-known nonprofit organizations include the American Red Cross, the United Way, and The Salvation Army. There are also nonprofit corporations known as nonstock corporations, which are usually formed for such purposes as clubs, rescue squads, and religious and charitable organizations.

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Not For Profit

Key Takeaways

  • In a not-for-profit organization, all funds either earned or donated must be used for pursuing the group’s objectives and paying its running costs.
  • Nonprofit funds never go to the group’s members, directors, or officers.
  • Many nonprofits have a lot in common with for-profit organizations and use similar business tactics and management techniques to run their enterprises.
  • Every not-for-profit organization has to maintain compliance with the state agency that regulates charitable organizations where it is based.

Understanding Not for Profit

Almost anyone can start a not-for-profit group and apply for tax-exempt status, but many not-for-profit organizations won’t qualify for 501(c)(3) status, as it is only for charitable organizations. Not-for-profit organizations can be social clubs that exist to serve their members, social welfare organizations, civic leagues, labor organizations, and business leagues. These would be tax exempt but not 501(c)(3).

If someone sees a need in their community or elsewhere in the world, they can research their idea and put together a business plan outlining the proposed nonprofit’s objectives and how it plans to meet those goals. To achieve tax-exempt status, the organization needs to request 501(c)(3) status from the Internal Revenue Service (IRS). To qualify, the organization’s purpose must be one of the following: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals. 

If desired, a not-for-profit organization can also opt to incorporate. Once registered and running, it has to maintain compliance with the appropriate state agency regulating charitable organizations.

For-Profit vs. Not for Profit 

Aside from the distinguishing feature that a not-for-profit organization does not distribute profits to its owners, many nonprofits have much in common with for-profit organizations. For example, while some not-for-profit organizations use only volunteer labor, many large or even medium-sized ones are likely to require a staff of paid full-time employees, managers, and directors. Indeed, as not-for-profit enterprises wish to accomplish their objectives in the same way as for-profit enterprises, business tactics and management techniques honed in the for-profit world often work well in not-for-profit organizations, too.

Finally, while for-profit businesses can engage in a huge range of activities, not-for-profit businesses must operate exclusively as a charity or for scientific, religious, or public safety purposes. Additionally, not-for-profit organizations may exist to collect income to dispense to other qualifying charities.

Even tax-exempt not-for-profit organizations are required to remit payroll taxes on behalf of their employees, who also must report income from nonprofits to the IRS.

Special Considerations

Thanks to their tax-exempt status, not-for-profit organizations are not subject to most forms of taxation, including sales tax and property taxes. In most cases, only donations made to nonprofit 501(c)(3) organizations are tax deductible. Not-for-profit organizations can be social organizations, sport clubs, etc. without a charitable purpose, so even if they are tax exempt, donations might not be tax deductible for donors.

For example, if a church is established as a not-for-profit organization, it does not pay property taxes on the house of worship that it owns. Similarly, if a not-for-profit charity accepts clothing donations, sells the clothing, and uses the money for its charitable purposes, it does not pay property tax on the building that it uses as its store.

However, not-for-profit organizations must remit payroll taxes on behalf of their employees. Similarly, the employees and directors who receive income from a not-for-profit organization must report the income to the IRS.

Common Problems That Not for Profits Encounter

In a survey of nonprofits in the United States and Canada released by the Nonprofit Research Collaborative in 2019, staffing was the biggest problem encountered by those surveyed; 18% identified challenges managing transitions in staff and the staff being too small. Salaries, of course, are generally higher in the for-profit world. The next most common problem, at 11%, was with donors: their cultivation, acquisition, and retention, as well as communications with them. Tying for third place at 10% was the state of the economy and the concomitant national mood and the impact of tax laws.

Organizational issues (involving boards, leadership, fundraising, and budgeting) clocked in at 9%, while local issues (especially too many nonprofits competing for funds) and problems with articulating a mission or purpose and creating programs to fulfill it tied at 8%. Other concerns included starting and ending campaigns, changing demographics, and government funding.

One problem not specifically mentioned in the survey (it would fall under the rubric of organizational issues) is what is termed “founder’s syndrome,” according to the Maine Association of Nonprofits. This happens when the founder of a nonprofit organization resists changes necessary to keep the group alive and thriving. The founder may have assembled a like-minded board when starting the organization, but as time passes and board members change, different ideas about what the group should be doing and how to go about it may arise, especially when external forces present new challenges. If a founder is trying to preserve their original vision when the organization needs to grow and change, founder’s syndrome has set in. As the board, not the founder, is responsible for running the show, this can lead to the difficult step of replacing the founder when compromise proves impossible.

Can a not-for-profit organization make money?

Yes, in the sense that it can seek donations to fund its operations and may end up with a surplus of money in its coffers at the end of the fiscal year. However, all of that money eventually must be used to fund the organization’s operations; it cannot be distributed to the organization’s owners as profit.

Are all nonprofits 501(c)(3) organizations?

No. The 501(c)(3) designation made by the Internal Revenue Service (IRS) only goes to charitable organizations. Social groups and sports clubs are two examples of organizations that can be tax exempt but not have 501(c)(3) status. Generally, organizations existing for scientific, religious, or public safety purposes can be tax exempt but not have 501(c)(3) status.

Are donations to all not for profits tax deductible?

No. Only donations made to organizations that have a charitable purpose are allowed as itemized tax deductions by the IRS.

Article Sources
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  1. Internal Revenue Service. “Exemption Requirements — 501(c)(3) Organizations.”

  2. Virginia State Corporation Commission. “Virginia Nonstock Corporations (Including Nonprofits).”

  3. Internal Revenue Service. “Exempt Organization Types.”

  4. Internal Revenue Service. “About Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.”

  5. Internal Revenue Service. “Exempt Purposes — Internal Revenue Code Section 501(c)(3).”

  6. Nolo. “How to Form a New York Nonprofit Corporation.”

  7. Springly. “501(c)(3) Donation Rules: Everything You Need to Know: Donating as a 501(c)(3) Organization.”

  8. Internal Revenue Service. “Exempt Organizations: What Are Employment Taxes?

  9. Nonprofit Research Collaborative. “Nonprofit Fundraising Survey and Donor Survey About Charitable Gifts in the United States, 2018,” Page 35 (Page 39 of PDF).

  10. Maine Association of Nonprofits. “Founder Transitions (and Founder’s Syndrome).”

  11. BoardSource. “Founder’s Syndrome.”

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