Because they are set up for charitable causes, they get the benefit of tax exemption. These organizations are dedicated to promoting the public good and use all their resources for charitable purposes only. However, not-for-profits are not required to operate for the benefit of the public good. A good example is a sports club—the purpose of the club is to exist for its members’ enjoyment.

  • Governments in many jurisdictions, such as the United States, Canada, and the United Kingdom, support the causes advanced by these organizations in many ways.
  • In a for-profit, the founders, investors, and C-suite leaders typically have a financial stake in the company’s success.
  • Overall, revenues collected must pay for goods or services to beneficiaries, financing community projects, administrative expenses (staff salaries, office expenses, supplies, etc.), and fundraising costs.
  • In fact, they do not distribute their surplus (i.e., the excess of revenues less expenses).

Many of the most familiar nonprofit organizations are 501(c)(3) charitable organizations. So, while an organization might informally consider itself to be a nonprofit, it would have to apply with the IRS for tax-exempt status. One of the more common ways an organization can qualify as tax-exempt is under the 501(c)(3) section of the tax code, which is generally for charitable organizations.

Advantages and Disadvantages of a 501(c)( Organization

Most businesses are for-profits that serve their customers by selling a product or service. The business owner earns an income from the profit and may also pay shareholders and investors from the profits. When you’re starting a business, it’s likely you’ll hear the phrases “nonprofit” and “not-for-profit” thrown around. However, nonprofits and not-for-profits are business structures with different tax implications, governance, and functions. Here are the ins and outs of what all these terms mean so you can figure out which structure is right for your new venture.

Private foundations, charitable trusts, and political organizations also must file a Form 990. Apply for the 501(c)(3) IRS exemption (Form 1023) and state tax exemption for nonprofit organizations after you’ve filed. Then create your organization’s bylaws, which specify how the organization will be structured and governed. 501(c) is a designation under the United States Internal Revenue Code (IRC) that confers tax-exempt status on nonprofit organizations. Specifically, it identifies which nonprofit organizations are exempt from paying federal income tax.

Nonprofit organizations and civic participation

The term third sector has also been used to describe nonprofit and nongovernmental organizations. Nonprofits solicit donations from individuals, corporations, or government entities. Then, they use those proceeds to deploy programs to benefit their target community. As a result of using funds for the betterment of the community, the IRS allows nonprofit organizations that meet appropriate requirements to be tax-exempt.

Examples of nonprofit in a Sentence

This will result in more money for the organization.[1] The activities a nonprofit is partaking in can help build the public’s confidence in nonprofits, as well as how ethical the standards and practices are. These organizations are eligible to receive government and private grants to help with funding and to further their mission. The organization must have a mission aligned with the purpose of the grant and a need for it to qualify. These organizations also often receive discounts from retailers, free advertising by way of public service announcements, and food and supplies from other nonprofit organizations designed to help in times of need. At a nonprofit, leadership is often structured as a board of directors who gain no financial benefit from their governance role. As the founder, you may still be involved in running the operational side of things, but the ultimate outcome is to ensure the organization meets its mission—rather than earning a profit.

non-profit organizations

Speak to an expert who can help you choose an entity that optimizes your tax deductions while serving your overarching goal. It’s also worth considering how your leadership style could gel or clash with the management structure of either entity. In a for-profit, the founders, investors, and C-suite leaders typically have a financial stake in the company’s success. It’s a win-win for you, the business owner, to see the company profit and succeed. This can lead to many business owners taking a more hands-on approach to the day-to-day management of the company.


Donors and governments often review program expenses against revenue to assess the efficiency and effectiveness of the NPOs they support. The size of the sector in the United States is much larger than many would imagine. According to the National Center for Charitable Statistics, in 2016, more than 1.5 million organizations were registered with the IRS. The nonprofit sector is a significant economic force, in 2013, it contributed to 5.4% of the country’s GDP and it accounted for 9.2% of all salaries and wages.

Leaders who are skilled at community outreach, fundraising, and are passionate about a cause are often a better fit for nonprofit organizations. Individuals and businesses can gain tax advantages through deductions made to nonprofits. NFPO comprises of non-governmental organizations (NGOs), civil society organizations (CSOs), private voluntary organizations (PVOs) and charities. In some cases, when emphasis is to be placed on the intention of a nonprofit organization, the term; ‘not-for-profit’ organization is used. It is however important to know that a non-profit organization makes profit or income but uses the profit for the projects and operations of the organization, which is to benefit the general public rather than for personal gains.

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