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What to Know About Not-For-Profit Entities

What to Know About Not-For-Profit Entities

Not-for-profit organizations do not make a profit for their owners. Any money earned or donated to a nonprofit organization is used to promote the organization's goals and keep it in business; income is not distributed to group members, directors, or officers.

Not-for-profits are generally tax-exempt charities or other types of public service organizations; they are not required to pay most taxes. Some well-known not-for-profit organizations include the United Way, American Red Cross, and the Salvation Army. There are also nonprofit corporations called non-stock corporations, which are usually incorporated for purposes such as clubs, rescue teams, charities, and religious organizations.


Understanding the Not-for-Profit

Almost anyone can create a not-for-profit organization and apply for tax-exempt status, but many nonprofits won't qualify for 501(c)(3) status because it's only Nonprofit organizations. Nonprofit organizations can be social clubs that exist to serve their members, welfare organizations, civic leagues, labor unions, and economic leagues. They would be tax-exempt but not 501(c)(3).

If an individual sees a need in their community or another part of the world, they can put their ideas together and write a business plan outlining the proposed nonprofit's goals and how they plan to achieve them. In order to obtain tax-exempt status, the organization must apply for 501(c)(3) status with the IRS. To qualify, the organization's aim must be one of the following: charitable, educational, fostering national or international amateur sports competition literary, preventing cruelty to children or animals, religious, scientific, or testing for public safety.

If desired, a nonprofit organization may also choose to incorporate. Once registered and operational, you must remain with the relevant state agency that regulates charities.


For-profit or not-for-profit

In addition to the distinguishing characteristic that a not-for-profit organization does not distribute profits to its owners, many nonprofit organizations have much in common with for-profit organizations. For example, while some nonprofits use only volunteers, many large or medium-sized organizations are likely to need paid staff, managers, and full-time managers. Now, how nonprofit companies plan to achieve their goals in the same way as for-profit companies, improved business tactics and management techniques in the for-profit world often work well for the benefit of nonprofit organizations too.

Finally, while for-profit corporations may engage in a wide variety of activities, not-for-profit corporations must operate exclusively as charities or for scientific, religious, or public safety purposes. Additionally, there may be non profit organizations that exist to collect funds to dispense to other qualifying charities.

 Tax-exempt nonprofits are also required to pay payroll taxes on behalf of their employees, who must also report nonprofit income to the IRS.


Special Considerations

Due to their tax-exempt status, not-for-profit organizations are exempt from most taxes, including sales and property taxes. In most cases, only donations made to 501(c)(3) nonprofit organizations are tax-deductible. Nonprofit organizations can be social organizations, sports clubs, etc. They are not charitable, so although they are tax-exempt, donations may not be tax-deductible for donors.

For example, if a church is incorporated as a not-for-profit organization, it does not pay property taxes for the place of worship it owns. Also, if a nonprofit charity accepts clothing donations, sells clothing, and uses the money for charitable purposes, it will not pay property taxes for the building it uses as a store.

However, not-for-profits must pay payroll taxes on behalf of their employees. Similarly, employees and executives who receive income from a nonprofit must report their income to the IRS.


Can a Not-For-Profit make money?

Yes, in the sense that you can ask for donations to finance your operations, and you risk ending up with the money remaining in your coffers at the end of the financial year. However, all this money must eventually be used to finance the organization's operations; it cannot be distributed to organization owners as profit.


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

No!!! The 501(c)(3) election made by the IRS only applies to charities. Sports clubs and social groups are two examples of organizations that may be tax-exempt but do not have 501(c)(3) status. Generally, organizations that exist for scientific, religious, or public safety purposes may be exempt from taxes but do not have 501(c)(3) status.


Are donations to all nonprofits tax deductible?

No. The IRS only allows donations made to charitable organizations as itemized tax deductions.


Summary

  • Any nonprofit organization must comply with the state agency that regulates charities in the state in which it is based.

  • In a nonprofit organization, all funds raised or donated must be used to promote the group's goals and pay for its operating costs.

  • Many nonprofit organizations have much in common with for-profit organizations and use similar business tactics and management techniques to run their business.

  • Nonprofit funds never go to group members, directors, or administrators.


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