When you think of a “nonprofit organization” what is the first thing that comes to your mind? You may think of an organization making a difference in your community. But what exactly is a non-profit organization?
Legally, an organization not dividing its profit and instead utilizing all the available revenue for public services after the general operating expenses is referred to as a non-profit organization. A non-profit organization can be incorporated or unincorporated. An unincorporated non-profit organization is not given the federal tax-exempt status or the 501(c)(3) organization designation as outlined by the Internal Revenue Service. When you incorporate a non-profit organization, it shares many characteristics with for-profit corporations, except that there are no shareholders.
The term “nonprofit” does not mean that there can be no profit, it just indicates that the profits will only go to the organization’s exempt purposes. They will never be distributed to the members or shareholders.
There are total 29 types of organizations that are tax-exempt under Section 501(c), which includes chambers of commerce and other business leagues, exempt under 501(c)(6), and state-chartered credit unions, which are tax-exempt under Section 501(c)(14).
The non-profit organizations are free from various taxes because of the contributions they make in the community. However, only 501(c)(3) groups will grant donors with a tax-deduction for their services.
General Characteristics of a Non-Profit Organization
A non-profit organization survives as a legal entity in its own right and independently from its founder(s).
The non-profit organizations usually govern themselves, they are not directly controlled by the government.
A Good Board of Trustees
A strong board of trustees is one that is diverse in skill set, has a passion for helping the organization move forward and is willing to share their business knowledge and financial support. It can be helpful for trustees to engage themselves in continuing education and workshops to stay current on the latest trends. An intelligent board of trustees develops strategic plans, focus on the long-term health of their particular organizations. This involves succession planning and leadership development.
Under the law, courts and creditors are limited to the assets of the nonprofit organization. The directors, founders, members and employees are not held personally liable for the organization’s debts.
Social Return on Investment (SROI)
Great performing non-profit organizations don’t simply value money, they depend on concise and crisp statements of their SROI to raise funds. An SROI statement describes the organization’s area of focus, the changes it tries to make, proof that those developments are happening and a knowledge of the magnitude of the complete problem it sets out to solve along with knowing how much of that problem the organization will address.
Just like any other businesses, a good and compelling non-profit organization grows if a sincere effort is put into it. It can successfully create social impact, raise money and grow at the rate of 10-20% or more yearly.
Eligibility for public and private grants
Non-profit organizations are permitted to ask for charitable donations from the public. Many government agencies and foundations limit their grants to public charities.
Advantages of Non-Profit Organization
Nonprofit organizations can survive long after their founders leave as long as their goal stays consistent and they continue to generate revenue.
Organizations that qualify as Non-Profit Organizations under Internal Revenue Code 501(c)(3) are eligible for the federal exemption from payment of corporate income tax. Once the non-profit organizations get exempt from this tax, they will generally be exempt from the similar state and local taxes. If the organization has acquired 501(c)(3) tax-exempt status, an individual’s or company’s charitable contributions to the non-profit organization are tax-deductible.
Usually the employees working for the non-profit organizations have their dedication, commitment and personal interest in the organization’s personal cause. Hence it is always a benefit to employ workers who believe in the organization’s mission, values, and philosophy. Also, employees with a personal interest in the organization may have a better understanding of the structure and processes of a non-profit organization.
Protection from Personal Liability
Employees of non-profit organizations are not personally liable for the debts of the organization. This means that if someone desires to sue your non-profit for a business-related debt, they cannot harm your personal assets.
Incorporating a nonprofit can enable you to formulate formalized roles with the respective job descriptions and responsibilities, which can interest professional and skillful candidates to join you.
One of the advantages for non-profit organizations is an extra source of funding by government grants.
If your non-profit organization has a suitable number of employees, it may qualify for life insurance benefit programs or group discounts for health.
Disadvantages of Non-Profit Organization
Time and Money to Start
If you’re planning to start a non-profit organization, it will demand your time for preparation and work devotion. It can also cost up to $800 just to submit your application to the IRS. So, to ensure that everything happens in the right way, you can always hire a consultant.
No shareholders can receive profits from the non-profit organization. This makes it difficult to generate interest from the potential investors. But, this does not indicate that you will not be paid a salary; it just means that profits at the end of the year must be cycled back into the organization.
Getting funding for your non-profit organization can be a constant struggle. There is always a high competition to receive funding from donors and grants. Many non-profit organizations also hire expert grant writers to give themselves a better chance.
Since a non-profit organization is dedicated to the public, hence anyone can request copies of any non-profit’s filings and review their salaries, expenditures, and income. If your non-profit organization has a large public facing, you can expect some inspection over how you manage administrative expenses.
If the pros and cons of non-profit organization line up with your personal values and goals, then you’re ready to take the first step to jump into a nonprofit role.