A nonprofit or not-for-profit organization is a type of business entity that exists for a particular cause, not to make a profit for its owners. The details of a nonprofit can vary between different organizations and their aims, but they are taxed differently than for-profit businesses and have a variety of different funding sources they can access. Nonprofit organizations typically depend on alternative sources of money other than revenues, and much of the work nonprofits do is focused on raising this money through a variety of popular methods.
Personal donations represent the money that individuals give to a nonprofit for its work. When a nonprofit organization holds an event to raise awareness in a community and accepts checks and donations from the people who attend, it is typically considered funding through personal donations. Individuals cannot contribute much alone, but when many different contributions are taken together it can fund a nonprofit successfully. Donors also receive tax breaks from the donations that they make.
Business donations are similar to personal donations but are made by corporations and business owners on behalf of the business. The process is similar, but the motivations are often different. Businesses may contribute primarily for the tax benefits involved, or a business may make a donation as part of a marketing strategy to improve its image in the eyes of customers. Nonprofits often depend heavily on business donations because they tend to be much higher than personal donations.
Grants are complex contracts between a nonprofit organization and another entity, usually a federal or state government. Grants are created by organizations for a specific reason, usually to help a particular social issue or fund a particular movement or interest. The nonprofit must apply for grant, showing exactly how it will use the money and how it will affect the necessary changes that the grant requires. The organization giving the grant also requires continual evidence of how the money is spent. This makes dependence on grants a laborious process, but they are still a popular source of income for many nonprofits.
While some people believe that a nonprofit business cannot sell products or generate revenue to fund itself, this is not exactly true. A nonprofit cannot give income to its owners, but the IRS does allow a nonprofit to create a for-profit branch, an entity within the organization that acts like a for-profit and can sell products or services. It is often taxed separately from the nonprofit, but the money it earns can help the nonprofit's causes and pay nonprofit employees.
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- 501c3; How To Get Funding For Your Nonprofit (Part II); Greg McRay, EA; March 2009
- Urban: Frequently Asked Questions
- Internal Revenue Service (IRS). "Publication 557," Page 3. Accessed Aug. 26, 2020.
- National Center for Charitable Statistics. "The Nonprofit Sector in Brief." Accessed Aug. 26, 2020.
- Internal Revenue Service (IRS). "Publication 526: Charitable Contributions," Page 3. Accessed Aug. 26, 2020.
- Internal Revenue Service (IRS). "Form 1023 and 1023-EZ: Amount of User Fee." Accessed Aug. 26, 2020.
- Harvard Business Review. "Should Your Business Be Nonprofit or For-Profit?" Accessed Aug. 26, 2020.
Tyler Lacoma has worked as a writer and editor for several years after graduating from George Fox University with a degree in business management and writing/literature. He works on business and technology topics for clients such as Obsessable, EBSCO, Drop.io, The TAC Group, Anaxos, Dynamic Page Solutions and others, specializing in ecology, marketing and modern trends.