Nonprofit Organizations - The Benefits

Think of nonprofit organizations and you immediately think of some of the better known and larger charities. However, nonprofit organizations (sometimes also called not-for-profit organizations or abbreviated as NPO) also exist in many other fields of education, research, the arts or religion. To be clear, ‘nonprofit status’ is not a way for a regular company or business to somehow avoid paying taxes or to protect themselves from lawsuits.

There are several advantages of forming or running a nonprofit organization as the advantage that immediately comes to mind is one of tax exemption. Most nonprofit organizations benefit from exemptions for income, property, sales and various other taxes. The property tax is particularly important as many institutions that have large property holdings, such as a hospital, would be penalized with huge property taxes if it weren’t for their exempt status. There is also an advantage for the organizations sponsors, or customers as well, as any contribution to a charity or nonprofit organization is often tax free for the giver as well. Just the fact that a company is nonprofit generally attracts more sponsorship and donations.

After the huge tax advantages, the other big advantage to creating or incorporating a nonprofit company is what is known in business and legal circles as limited liability. This means that the directors and employees or members of an organization are not personally liable in the event of a lawsuit being brought against them. Likewise, if the company or organization goes out of business but still owes money to its lenders, neither the owners nor the employees will be assessed the debts. Apart from the effective federal laws, most states do an excellent job of providing comprehensive protection to nonprofit organizations.

There are other advantages of forming a nonprofit organization; to some degree the size of your company, its overheads and number of employees and customers will determine how relevant these may be. Most nonprofit organizations enjoy an exemption from the normal rules and regulations of union activity and bargaining even if their workers belong to a union. Nonprofit agencies can also benefit financially from lower postage rates than those used by regular companies or individuals. This could result in a huge boon of money savings if your company regularly mails out materials in bulk. To enjoy this benefit, you need to apply to the Post Office for a permit to mail at lower rates, although this is usually a formality. Not only postal mailings, but a nonprofit agency may also have access to free or reduced rate advertising, for example in newspapers or TV.

To qualify to be a nonprofit organization, a business or commercial venture must be seen to serve some kind of purpose which benefits the public. This may be scientific, educational, religious or charitable in scope. Following these broad guidelines will allow your company to qualify as far as tax exemption and other benefits. To actually qualify to be recognized and start doing business with nonprofit status, you must apply to and be approved by Congress in order to become a legitimate nonprofit company. Your company also needs to be approved by the IRS who will review the application and then declare the organization to be exempt from taxes. In the eyes of the IRS you are then what is known as a 501c3 organization, this designation being the tax code used to indicate tax exempt companies.

A further condition of qualification is that nonprofit companies are prohibited from lobbying for or against political candidates. And of course, by definition a non profit organization is not set up to make a profit although the company must still make enough revenue to cover its overheads, and pay employees. Although a nonprofit company is not actually “prohibited” from making a profit, there are strict limitations as to how it may actually make a profit and what those profits can then be spent on. And if your nonprofit company does in fact make a profit - then you will be required to pay taxes on that amount. You may also be required to form a separate company or corporation as an offshoot of the main one, in order to pursue making profits legitimately. Nonprofit companies typically donate and sell shares or pay dividends, and some directors may receive compensation or bonuses within reason. A nonprofit organization must have its accounts and records available and ready for audit by the IRS anytime.

There are many types of companies and businesses that qualify and might benefit from forming nonprofit organizations. For tax exempt purposes, the IRS actually recognizes 26 different types of nonprofit organizations, businesses or societies. These can range from huge nationally known charities, such as the Red Cross, to smaller organizations run solely for its members benefit, such as homeowners associations, or private clubs. Not surprisingly, around a third of nonprofit groups in the United States are churches or other religious concerns. Some organizations that are considered to be nonprofit organizations may surprise you as most professional football clubs, chambers of commerce and labor organizations all technically fall into the category. And the largest nonprofit organization in the United States? That distinction belongs to a name you usually associate with huge profits - the Bill Gates foundation, which has funds of around $27 billion.

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