Not for Profit

What Does Not for Profit Mean?

Not-for-profit organizations are types of organizations that do not earn profits for its owners. All of the money earned by or donated to a not-for-profit organization is used in pursuing the organization's objectives and keeping it running. Typically, organizations in the nonprofit sector are tax-exempt charities or other types of public service organizations, and as such, they are not required to pay most taxes. In a nonprofit organization, income is not distributed to the group's members, directors, or officers. There are also nonprofit corporations known as non-stock corporations. Some well-known nonprofit organizations include the American Red Cross, United Way, and the Salvation Army.

Understanding Not for Profit

Almost anyone can start a not-for-profit and apply for tax-exempt status, but most not-for-profit organizations won't qualify for 501(c)(3) status. 501c3 is only for charitable organizations. But not-for-profits can be organizations like social clubs that exist to serve their members. They can be tax-exempt, but not 501(c)(3).

If someone sees a need in their community or elsewhere in the world, they can research their idea and put together a business plan, outlining the proposed nonprofit's objectives and how it plans to meet those goals.

To achieve tax-exempt status, the organization needs to request 501(c)(3) status from the Internal Revenue Service (IRS). If desired, the not-for-profit can also opt to incorporate. Once registered and running, the organization has to maintain compliance with the appropriate state agency regulating charitable organizations.

For-Profit vs. Not for Profit 

Aside from the distinguishing feature that a not-for-profit organization does not distribute profits to its owners, many nonprofits have much in common with for-profit organizations. While some not-for-profit organizations use only volunteer labor, for example, many large or even medium-sized nonprofits are likely to require a staff of paid full-time employees, managers, and directors. Indeed, since not-for-profit enterprises wish to accomplish their objectives in the same way as for-profit enterprises, business tactics and management techniques honed in the for-profit world often work well in not-for-profit organizations too.

Finally, while for-profit businesses can engage in a huge range of activities, not-for-profit businesses must operate exclusively as a charity or for scientific, religious, or public safety purposes. Additionally, not-for-profits may also exist to collect income to dispense to other qualifying charities.

Even tax-exempt not-for-profit organizations are required to remit payroll taxes on behalf of their employees, who also must report income from nonprofits to the IRS.

Special Considerations

Thanks to their tax-exempt status, not-for-profit organizations are not subject to most forms of taxation, including sales tax and property taxes. In most cases only donations made to non-profit, 501(c)(3) organizations are tax deductible. Not-for-profit organizations can be social organizations, sport clubs, etc. without a charitable purpose. So even if they are tax-exempt, donations might not be tax deductible for donors.

If a church, for example, is established as a not-for-profit organization, it does not pay property taxes on the house of worship it owns. Similarly, if a not-for-profit charity accepts clothing donations, sells the clothing, and uses the money for its charitable purposes, it does not pay property tax on the building it uses as its store.

However, not-for-profit organizations must remit payroll taxes on behalf of their employees. Similarly, the employees and directors who receive income from a not-for-profit must report the income to the IRS.