What is a nonprofit organization?
Though you may not realize it, you probably utilize the services of a nonprofit on a regular basis. When you use a library, go to a school or college, attend church or join a club, you’ve witnessed the work of a nonprofit organization.
A nonprofit organization is a group that works to achieve a mission for public good. Unlike a for-profit company, a nonprofit focuses on making social change instead of making a profit. Where a for-profit company must answer to shareholders, a nonprofit must answer to a board of directors.
Unincorporated vs. incorporated nonprofits
A nonprofit can be unincorporated or incorporated, depending on the wishes of the people who start the group. As an example, suppose a bunch of people form a group to plant a community garden. At first, they’d probably keep it simple and not incorporate, instead choosing to run the organization through volunteer labor and simple fundraising activities.
If the group decided it needed or wanted to grow by hiring staff or writing grant proposals, it would need to file to incorporate as a 501(c) corporation with the state government in which it exists. There are a number of types of 501(c) corporations, but the most common is a 501(c)(3), which covers organizations that are “Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations.” (Source: Wikipedia)
Donations and tax exempt status
Donations to a 501(c)(3) organization in particular may be deducted from one’s federal income tax.
Once a nonprofit has incorporated, it is exempt from certain taxes such as property and sales taxes. It may also apply to be exempt from federal income taxes. It is limited in its political activities and may not lobby for or support a particular party or candidate, but may engage in advocacy on a social issue.
At this point, the organization is considered a “public trust” and must be accountable for achieving its mission, for governing itself properly and for its expenditures. Incorporated nonprofits are governed by a written document called the organization’s “by laws” and have a governing board of directors or board of trustees who are responsible for setting the organization’s strategy and policies as well as fiscal oversight.
Contrary to popular belief, a nonprofit is permitted to charge fees for its services and to have surplus revenue in the bank. Unlike a for-profit corporation that pays dividends to its shareholders, a nonprofit must use its excess funds for maintaining the organization’s activities and creating new programs.