What Exactly is a Nonprofit Organization?

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Our country has a long and rich tradition of people coming together to form nonprofit organizations that solve problems and benefit their communities and the world at large.

The concept of a nonprofit is an important part of our history and culture.

When you think of a nonprofit organization, what do you think of?

You might think of a group making a difference in your community such as your local animal shelter. Or, maybe you’re thinking of a large organization, such as United Nations Children’s Fund (UNICEF).

Regardless of whether it’s local or global, you know there are some fundamental differences between how these organizations operate compared to a traditional for-profit company which begs the question……

“What is a nonprofit, anyway?”

The difference between a for-profit and a nonprofit can be a foreign concept – and easily misunderstood – so let’s break it down to understand the main differences.

HOW A FOR-PROFIT COMPANY OPERATES

In the US, the most popular company structure is the C-Corporation. The main reason this company exists is to serve its customers and generate profit for its shareholders.

Here’s the basics of how a C-corporation operates:

  • Issues shares or stock to represent ownership.
  • Distributes profits however they want (dividends etc.).
  • Is run by shareholders (owners) or a Board of Directors elected by shareholders.
  • Is taxed on all income in addition to any compensation it pays out.
  • A charitable purpose is not required (but it’s awesome when they do it).

HOW A NONPROFIT ORGANIZATION OPERATES

A Nonprofit Organization is a type of business entity that has followed the proper recording of Nonprofit Articles of Incorporation, which allows it to apply to the IRS for Tax-Exempt status, called a 501(c)3.

501(c)3 tax exempt status is bestowed to the company when the IRS determines that the Nonprofit Corporation shall NOT be subject to taxation because of the benefit it provides to society through its “exempt” or “charitable” activities.

Here’s the basics of how a Nonprofit operates:

  • Does not issue ownership shares or stock.
  • Reinvests profit within the company(you can still get a salary).
  • No shareholders (owners), so they’re always run by a Board of Directors or “Trustees”.
  • Provides charitable activities to society and can apply for 501(c)3 Tax-Exempt Status from Federal taxes.
  • Once 501(c)3 is obtained, may apply for exemption from state (sales, etc.) and local taxes (property, etc.).

THE #1 ADVANTAGE OF A NONPROFIT ORGANIZATION 

Nonprofits offer tax-deductibility for donations from individuals and corporations.

Any person or corporation who contributes to a 501(c)3 may write off the amount of the donation from the “top line” of their income.

This is the #1 advantage of obtaining 501(c)3.

For example, if someone earns $60,000 per year of taxable income, and is subject to Federal Income tax at the rate of 40% or $24,000, leaving them with $36,000 after taxes, they may elect to donate $10,000 to a 501(c)3, and reduce their tax bracket to 30% on $50,000 of income, equaling $15,000 in taxes and an after-tax remainder of $35,000.

BOOM.

You can save a ton of money on your taxes and contribute to changing the world at the same time.

That’s a winning combination.

WHAT DOES ALL THIS MEAN?

It means that nonprofits exist solely to benefit others, reinvesting 100% of their money back into the company to continue crushing their missions and benefitting society.

It means that the government likes it when you improve the world, therefore rewarding tax relief to all the companies and individuals that participate.

It also means that for-profits can do amazing things with nonprofits.

Finally, it means that you can build a business because you love it (and not just because you need to profit from it), make an impact, and still be successful.

I hope you find this useful. We help a lot of people navigate the nonprofit waters daily and are happy to help you any way we can.

Cheers,

Jacqui Long, Comms & Culture, Yippiekiyay

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