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Just What Is a Nonprofit Organization?

The question of what a nonprofit organization is may seem easy to answer. But “nonprofit” is one of those terms that seems to have a different meaning depending on who you ask.

The Difference Between Profit and Nonprofit

The most common answer you’ll get when you ask “what is a nonprofit business,” is the tautological, “it’s a business that doesn’t make a profit.” That definition is hardly helpful, although it is technically accurate.

Very generally, most businesses are in business to amass profit. The profit may be used to reinvest, or pay its investors or shareholders. The more the business makes, the more the shareholders and investors make.

But the goal of a nonprofit isn’t to amass wealth, or pay investors. Nonprofits are allowed to make profits—and should, unless they want to be out of business. However, the nonprofit must use those funds to generate money to operate, expand, and carry out its mission.

There is a common misconception that nonprofit organizations are poor, or are limited to smaller businesses. Nothing could be further from the truth. Some of the largest companies in the United States are nonprofits. The Red Cross, large hospital chains across the country, the United Way, and others are some of the biggest nonprofits in the country. They deal with millions of dollars annually, and many of their officers are paid handsomely.

In fact, there is no law that restricts what any officer may take as salary, although any salary should be reasonable in comparison to the company’s total budget.

Tax Differences in Nonprofits

The IRS does allow nonprofits to be tax exempt, and entitles donors to nonprofits certain tax benefits. This is the commonly-referred to 501(c)(3) section of the tax code.

But to receive these benefits, a nonprofit must be involved in causes that have to do with religion, education, science, literature, public safety, amateur sports, or the prevention of cruelty to children or animals.

There is a difference between nonprofit organizations, and “not-for profit” organizations. The former is relegated to the categories above, but a not-for-profit can be much broader, including organizations that simply serve the interests of its members, such as a ukulele club or a bird-watching organization.

It makes a difference because the IRS doesn’t allow expense deductions for not-for-profit organizations (although there may be other tax benefits under state law). Both companies still have to pay other taxes, such as salary taxes.

A nonprofit can lose its exempt status if it starts to engage in ventures outside its mission, and nonprofits are specifically prohibited from lobbying, or contributing to political campaigns.

On a day-to-day basis, nonprofits may operate just like a profit business, with boards of directors, bylaws, and articles of incorporation. Directors will have the same fiduciary duties to the company as they would in a profit business.

What’s the best business entity for your business or cause? Make sure you’re operating as the correct entity, and getting all the tax benefits that you can. Contact Tampa business attorney David Toback to discuss your needs and protect your business interests.

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