What Are Nonprofit Organizations?

by Sam Ashe-Edmunds; Updated September 26, 2017
Volunteers Collecting Food Donations In Warehouse

Nonprofit organizations are business entities founded for a purpose other than to make more money than they spend. They usually must serve a purpose that creates a good for society in general, or for a particular segment of society. Depending on their mission, nonprofits can receive state or federal recognition that affects how much tax they must pay.

State-Level Nonprofits

All nonprofits incorporate at the state level. This is a relatively simple process that includes writing Articles of Incorporation, filling out an application form and paying a fee, often $100 or less. The Articles of Incorporation is a short document that includes the organization’s purpose, mailing address, names and addresses of its board members and a clause stating what will happen to the organization’s assets if it disbands. Many nonprofits never organize beyond this level or seek federal tax-exempt status, because they might not raise and spend much money, or need much help lowering their taxes. State-level nonprofits often don’t pay state sales tax, might qualify to receive state grants, or might be allowed to participate in state-sponsored programs.

Federal Tax-Exempt Organizations

When people or businesses donate money to a nonprofit that only has a state-level recognition, they do not get to deduct the donation as an income tax write off. People can only write off a donation made to an organization given 501(c)(3) tax-exempt status by the Internal Revenue Service.

Tax-exempt nonprofits don’t pay income tax on revenues related to the organization’s primary purpose. This can amount to a considerable savings if the organization has large revenues, such as a trade association with thousands of dues-paying members, an annual conference and advertising sales. Based on the designation they receive, tax-exempt organizations may or may not participate in political lobbying or endorsements.

Making a Profit

If a nonprofit of any classification takes in more money than it spends, this does not violate its status as a nonprofit. If the nonprofit keeps losing many each year, it might go out of business. Many nonprofits wait to see how much income and expense they have each year, then try to spend most of their excess income on their stated purpose, leaving some of the excess profits as a cushion in case of future financial shortages. If the nonprofit continues to make large profits, does not use those profits for its primary purpose and pays board members large salaries, the state or IRS might revoke the organization’s nonprofit status.

Charities

Not all tax-exempt organizations enjoy the same benefits. A charity, which receives a 501(c)(3) designation, is expected to operate for the greater public good rather than to promote a segment of society. For example, an organization that collects and donates funds for cancer research helps all types of citizens. A trade association for plumbers primarily works to benefit plumbers, and would not receive a designation as a charity.

Trade Associations

Along with charities, trade associations are one of the more common types of nonprofits. They receive a 501(c)(6) tax-exempt designation. This means they do not pay income tax on revenue related to their primary purpose, but donors do not get tax write offs. These organizations must pay income tax on revenue-producing activities not related to their primary purpose. For example, if the trade association for plumbers sells hats, T-shirts, mugs and other items that make the association a profit, that income is classified as unrelated business income.

Other Nonprofits

The IRS awards dozens of different 501(c) classifications based on the activity of the organization. Community sports and recreation organizations often receive 501(c)(4) designation, for example. These organizations can lobby legislatures and endorse candidates without a special request from the IRS.

About the Author

Sam Ashe-Edmunds has been writing and lecturing for decades. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards. He is an internationally traveled sport science writer and lecturer. He has been published in print publications such as Entrepreneur, Tennis, SI for Kids, Chicago Tribune, Sacramento Bee, and on websites such Smart-Healthy-Living.net, SmartyCents and Youthletic. Edmunds has a bachelor's degree in journalism.

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