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What Makes It a Nonprofit? Featured

What Makes It a Nonprofit? Austin Distel

When starting a business, you are likely to come across many phrases, key among them some terms like “nonprofit” and “not-for-profit” often thrown around. While it can be easy for you to assume that they mean the same, they are actually different from each other. That is why you need to understand it properly before you embark on the company registration exercise. The differences between the two have implications on taxation, governance and functions. While the two are close, they contrast with for-profit organizations. Here is what the terms mean so that you can understand which one is the right one for your business venture.

Nonprofit organization

A nonprofit organization is an organization that qualifies for IRS tax-exempt status. This is because its mission and purpose are to further social cause and benefit the public instead of making profits. Some of the nonprofits include charities, foundations, universities and hospitals. For an organization to qualify as a nonprofit, it must serve the good of the public in a particular way. They should also not distribute profits or anything else apart from furthering the organization's development. Therefore, as the owner of the organization, you must make your financial and operating information public so that it can be accessed and reviewed by the donors who want to know how their contributions are being used. The individuals or businesses making donations to nonprofits can deduct their donations from their taxes when filing their returns. On the other hand, nonprofits pay no taxes on money received through fundraising.

Not-for-profit organizations

Like nonprofits, not-for-profits (NFPOs) do not earn profit for the owners. Rather, the money received or earned from the business operations they undertake or from donations is channelled back to the organization's running. However, unlike nonprofits, not-for-profits are not required to work towards the benefit of the public. They can serve the goals of their members. Some good examples of not-for-profits include sports clubs whose purpose is to exist for the enjoyment of their members. These organizations are required to apply for IRS tax-exempt status, including exemptions from sales and property taxes. This means that the money donated by a person for a not-for-profit cannot be deducted from that individual’s tax return.

Differences between nonprofits and not-for-profits

The key differences between nonprofits and not-for-profits include”

  • Nonprofits are formed exclusively to benefit the public, while not-for-profits are meant to fulfill the owners' objectives.
  • Nonprofits can have a different legal entity, while not-for-profits cannot
  • Nonprofits are run like a business by striving to make a profit that does not support any single member. On the other hand, not-for-profits are “recreational organizations” that operate for the benefit of their members.
  • The employees of a nonprofit are paid, but their paychecks do not come through fundraising. Not-for-profits are run by volunteers

For-profit organizations

These organizations operate with the main goal of making money. Most businesses are for-profits whose goal is to offer products and services to customers for profit. The business owner earns income from the for-profit, which can be paid to stakeholders and investors.

Regardless of the type of organization you decide to start between the three, the first step is to create a legal entity and start filing a business entity in the state you intend to run operations. Your entity can be a corporation, partnership, limited liability company or sole proprietorship. All these can operate as nonprofits, for-profits or not-for-profits. The choice of the legal entity depends on the goals of your business. Regardless of the type of business you start, the good thing is that you can change the type of business you operate any time you want to any of the three. The good thing is to speak to the experts and ask around how you can do it right.

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Scott Koegler

Scott Koegler is Executive Editor for PMG360. He is a technology writer and editor with 20+ years experience delivering high value content to readers and publishers. 

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