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What is a Nonprofit Organization?

  • What does 501(c)(3) mean?

  • What does tax-exempt mean?

So you have heard the term before, but do you really know what a nonprofit organization is? There are legal definitions, including 26 types of nonprofits recognized by the IRS, and there are common perceptions of what people mean when they refer to an organization as nonprofit. Let's start with perceptions.

A nonprofit is a tax-exempt organization that serves the public interest. In general, the purpose of this type of organization must be charitable, educational, scientific, religious or literary. This is a common and broad definition that fits the type of information likely to be found at this site. The public expects to be able to make donations to these organizations and deduct these donations from their federal taxes.

Legally, a nonprofit organization is one that does not declare a profit and instead utilizes all revenue available after normal operating expenses in service to the public interest. These organizations can be unincorporated or incorporated. An unincorporated nonprofit cannot be given federal tax-exempt status or the designation of being a 501(c)(3) organization as defined by the Internal Revenue Service. When a nonprofit organization is incorporated, it shares many traits with for-profit corporations except that there are no shareholders.

When starting a nonprofit corporation, the organization must file articles of incorporation with the state in which it resides or decides will be its jurisdiction for legal purposes. This is the same process a for-profit corporation must follow. Each state has various rules and regulations, but most require officers of the corporation, a board of directors, by-laws and annual meetings. Most states also require nonprofit organizations to register with state charity bureaus or other agencies and adhere to reporting requirements particularly involving fundraising operations.

When a nonprofit corporation is given tax-exempt status, it is exempt from paying federal corporate income tax. While these types of organizations also are often exempt from paying state and local sales tax, property tax and taxes on other assets, this is not always the case as states have different rules. Tax-exempt nonprofits also can benefit from lower postal rates.

Nonprofit organizations have paid and volunteer staff, but employment taxes and federal and state workplace rules are generally no different than those imposed on for-profit organizations. A perception is that salaries in the nonprofit world are low and while this is generally true, the type of nonprofit organization can make a huge difference in how closely it compares to a for-profit business.

Universities, hospitals and large national charities are examples of organizations that can be "nonprofit" but have salary scales on par with almost any for-profit corporation. CEOs of major hospitals can commonly earn salaries and bonuses of $500,000 to over $1,000,000. University presidents can have similar scales. However, local literacy training centers or a food banks generally will be places where lower salaries are supplemented by payment in a smile from an adult who reads a first book or a family with enough food for everyone to eat a meal.

A nonprofit organization can have clients, can offer products and services, will need revenue, should market itself, and must be concerned about customer satisfaction whether in those assisted or those who contribute donations in support of operations, programs or services. It is a business that must serve the public interest and it will succeed or fail as any business will, depending on how well it is operated.

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