What is a Non-Profit?

Recent counts by the National Center for Charitable Statistics estimate that there are currently more than 1.5 million active nonprofits in the United States. With a business structure so popular, you’d think it would be easy to describe what exactly a nonprofit is; however, if you can do so in a sentence or two, consider yourself part of a minority. Many people attempt to classify nonprofits as charities, which does fairly capture some nonprofits, but that description doesn’t describe exactly what a nonprofit is or how a nonprofit functions. 

Definition

What defines a nonprofit corporation is the way in which it’s different from a for-profit corporation. Nonprofits, as the name would suggest, are corporations operating without the intent of financial gain for shareholders, owners, or any individuals. But this doesn’t mean a nonprofit doesn’t bring in money, as no business can last if it’s not financially sustainable.  What nonprofit means is at the end of the fiscal year, when the nonprofit has paid all of its bills, any profit left over must be put back into the organization or implemented in ways that further its cause. None of the remaining profits will be distributed to owners, officers, directors, or individuals. So whether the nonprofit’s cause is cancer research, literacy, or preserving rainforests, the nonprofit—although it will cover the costs of employee salaries and other operation costs—is never paying out profits to individuals.  

Non-profit corporation structure

When people say the word “nonprofit,” what they are actually referring to is a nonprofit corporation, as any nonprofit that has been legally formed with a state is a nonprofit corporation. Nonprofits utilize the same structure as for-profit corporations, with one major difference: nonprofit corporations do not issue stock to shareholders. In fact, many official state forms refer to nonprofit corporations as “nonstock corporations.” In states like Michigan, Kansas, Pennsylvania, and Wisconsin, where nonprofits are allowed by state law to issue shares, these shares are issued to founding members as a way to divide and establish control of the organization. In the extremely rare cases when stock has been sold to shareholders, the shares have basically been a symbolic way of acknowledging donors’ contributions, as they do not give the shareholders any rights or chances at financial gain.

Nonprofit corporations do, however, follow all other pertinent corporate guidelines. They are formed at the state level by filing articles of incorporation. Most states require nonprofit corporations file annual reports. Nonprofits also adopt and adhere to their bylaws, file corporate resolutions, and meet all the same conditions that state law requires of for-profit corporations.

Tax Status

It’s a common misbelief that all nonprofit organizations become tax-exempt entities upon incorporation. Although many nonprofit corporations have been granted tax-exempt status by the Internal Revenue Service, that status is only granted after a nonprofit has been through a lengthy application process.  Nonprofit corporations by default have no special tax exemptions, by default. They pay a regular corporate tax rate to both the state and federal governments and employees are paid standard W-2 wages.  Many smaller nonprofits choose to pay the corporate taxes versus going through the tax-exemption application process.

Income

Every business entity needs income and nonprofits are no different; however, nonprofits have  many different avenues for pursuing revenue. Some do collect donations from the general public, but few nonprofits rely solely on charity and goodwill. Many smaller nonprofits and associations collect membership fees, or solicit money only from members. And many nonprofits are actively engaged in sales. Consider the Girl Scouts of America; the Girl Scouts take sell more than $200 million worth of cookies each year, and that sales revenue helps to fund regional arms of the organization and pay for community projects and troop activities. Other nonprofits provide fee-based services to fuel income. Some nonprofit corporations rely heavily on grants from the government, for-profit corporations, and privately-funded foundations. Most nonprofits’ income relies on a thorough mix of all the funding sources mentioned above.

 

What causes a nonprofit chooses to pursue and how that nonprofit plans to fund and actively promote its vision depends entirely upon the entity and what purpose the founders are passionate about. If you’re thinking about starting your own nonprofit, you’ll find a wide range of articles here to help you make the right plans and decisions for your enterprise.    

About the Author

Drake Forester, Chief Legal Strategiest - Northwest Registered AgentDrake Forester is the chief legal strategist at Northwest Registered Agent, LLC. Throughout his career, Drake has researched many complicated nonprofit compliance issues and provided whitepaper and publications for many leading nonprofit organizations in the United States.