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What Is a Nonprofit?
A nonprofit corporation is an organization that has a purpose far beyond making a profit. Instead of owners and shareholders keeping the company’s earnings like they might in a C Corp, a nonprofit typically focuses on a larger mission, donating revenue toward a specific cause or goal that benefits the public.
According to the National Council of Nonprofits, there are more than 1.3 million charitable nonprofits in America.
However, being a nonprofit doesn’t mean that the company doesn’t make money. It just means that the company must put the money it does make back into the organization to pay for employee salaries, administrative expenses and other overhead costs.
The Benefits of Starting a Nonprofit
There are four main advantages to becoming a nonprofit:
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Doing Good
A nonprofit works toward a specific cause or goal, meaning owners and employees can feel good about their work and their contributions to society.
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Tax Exemption
This is a big one. Once a business becomes a 501(c)(3) classified nonprofit, it’s tax-exempt. When an organization is tax-exempt, the company doesn’t have to pay federal income tax on profits earned from activities related to the nonprofit’s primary purpose.
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Legal Protection
Nonprofit founders and members are generally not held personally responsible for a nonprofit’s debts. Plus, a nonprofit doesn’t even have to be 501(c)(3) status (more on what that means later!) to get this legal protection or to have benefits that become available for employees, like health and retirement plans.
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Longevity
A nonprofit corporation that follows the incorporation steps to formalize its existence improves the chances for longevity and success because an official, legal entity will appear more credible and trustworthy to potential donors.
There are also a few disadvantages of becoming a nonprofit:
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Lack of Funding
Like most businesses, nonprofits can cost money and time to start. Plus, nonprofits get a lot of money via donations, which can be an unreliable revenue stream. Even if a nonprofit hopes to receive money from grants, remember that there are more than 1 million nonprofits in the U.S. That means there is a lotof competition for those grants and other funding resources.
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Paperwork, Paperwork, Paperwork
Nonprofits must keep excellent records and file all paperwork yearly, like an in-depth annual report with the Secretary of State. It can be overwhelming, but there are professionals nonprofits can hire to handle it.
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Public Scrutiny
Since nonprofits exist to serve the public, these companies are also under greater public scrutiny. Nonprofits must make financial statements publicly available, so if the organization has a rough year, the people and press will know about it.
Forming a Nonprofit in Your State
Each state has different rules, regulations and fees for forming a nonprofit. For example, it costs $270 to start a nonprofit in Maryland, but in Kentucky, it only costs $8. Use Incfile’s filing fees chart to easily research and compare state fees before starting your business.
Four Types of Nonprofit Organizations
There are four main types of nonprofit in the United States. Each type has slightly different goals and corporate structure (but all are tax-exempt!). They include:
Charities, also known as 501(c)(3) organizations, typically provide low-cost or free services to the public using funds received through donations. This can be through private donations or fundraising events specifically designed to get funding from members or advocates. Examples of public charities include food banks and animal welfare organizations.
This type of group is member-based and sets out to achieve specific goals regarding political change without achieving a profit. Social advocacy organizations, classified by the IRS as 501(c)(4), use donations and member dues to send out information that promotes a particular social agenda. The NAACP and the ACLU are social advocacy organizations you may be familiar with.
Like charities, foundations are also classified as 501(c)(3) organizations. They often work to better the community, whether contributing financially to local, smaller charities/nonprofits or holding events that benefit communities. They are funded by and contribute on behalf of an associated for-profit corporation. Foundations must donate a certain amount of income to other organizations every year. The Bill and Melinda Gates Foundation is one of the most well-known foundations.
These types of organizations are classified as 501(c)(6). They typically work to benefit and promote members’ business interests and are funded primarily through membership dues. Common trade and professional organizations include chambers of commerce and real estate boards.
Nonprofit vs. Not-for-Profit: Is There a Difference?
The terms nonprofit and not-for-profit are not interchangeable. Both types of organizations exist to collect and distribute money, but they are treated differently for the purposes of taxes, charters and financial reasons.
The most significant difference between nonprofits and not-for-profits is that a nonprofit is a formal, legal entity for tax, governance and management purposes (similar to an LLC or corporation). A not-for-profit isn’t generally a separate legal entity, and they are less common than nonprofits.
Nonprofit corporations exist for charitable purposes, like offering assistance to socially disadvantaged people, providing education, promoting the arts or running an animal shelter. They typically carry out bigger-scale, organized charitable activities.
Not-for-profit organizations are generally associations formed by groups of people for achieving the organization’s objectives. This could include membership associations, sports clubs, civic leagues and business leagues.
While nonprofits can apply for tax-exempt status, not-for-profits do not qualify for tax-exempt status under 501(c)(3). Instead, a not-for-profit needs to meet 501(c)(7) IRS guidelines to be considered for tax-exempt status. The IRS mandates that a not-for-profit must be organized for pleasure, recreation and other similar non-profitable purposes.
Is Starting a Nonprofit Right for You?
Nonprofits are usually established with a higher purpose in mind, like a religious, educational or charitable cause.
Common types of nonprofits include:
- Schools/universities
- Hospitals
- Museums
- Churches
- Food banks
- Homeless shelters
If you’re passionate about a particular cause, creating a nonprofit may be right for you. But don’t go it alone — there are complicated rules for establishing a nonprofit and attaining tax-exempt status.
How to Start a Nonprofit Corporation
While the incorporation process is accessible to all nonprofits, only those that meet specific parameters can achieve the 501(c)(3) tax-exempt status and corresponding benefits. Despite how attractive this sounds, you shouldn’t enter into a nonprofit lightly. While tax-exempt status sounds great, for most founders out there, the reason to start a nonprofit goes beyond saving on taxes.
Common Questions About Nonprofits
You will need to spend money to start a nonprofit, but it is possible to get up and running without opening your own wallet if you absolutely have to. There are federal, state, local, corporate and foundation grants that you can apply for to get help with your startup costs. You could also raise money from those in your community who believe in your mission to get started.
Yes, founders can receive a salary that qualifies as “reasonable compensation.” The IRS defines reasonable compensation as “the amount that would ordinarily be paid for like services by like organizations in like circumstances.” Look at similar titles and salaries for like organizations in your area to get a starting point for your founder’s salary.
Nonprofit owners are typically called “founders.” While they can make a salary, any profit that the organization makes must go back into the nonprofit and/or its causes.
With the COVID-19 pandemic, remote work has become very commonplace. You can absolutely start a nonprofit from your home. The process for incorporation is the same as if you were working out of an office.
With all small businesses, it’s important to have a budget, but it’s especially essential for nonprofits because your financial statements are publicly available. Every nonprofit will have a different budget depending on your company size and goals. Learn more about creating a budget for your unique nonprofit.
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