Advantages of Non Profit Organizations: Everything You Need to Know
The advantages of non profit organizations include tax-exempt status with the IRS and personal liability protection for employees. The process of running a nonprofit organization, however, can be difficult. 3 min read
The advantages of non profit organizations include tax-exempt status with the IRS and personal liability protection for employees. The process of running a nonprofit organization, however, can be difficult. Some organizers can burn out quickly if they do not completely understand what goes into having a successful career in the nonprofit sector.
A nonprofit organization (NPO) is classified as one that receives goods, donations, sponsorships, and services to help it pursue and further its mission. A nonprofit's purpose is often to serve the community through such organizations as:
- Chamber of commerce
Nonprofits might also promote and serve a social cause such as:
- Humanitarian aid
- Research for disease
- Funding education
Nonprofit businesses differ from for-profits in that for-profit businesses were designed to share profits with their investors and shareholders. When a business wants to become a nonprofit, the first step toward becoming a tax-exempt charity entity is incorporation.
Once a nonprofit organization achieves tax-exempt status, it will not have to pay any income tax on money or donations it earns as part of its fundraising efforts. Additionally, it will not distribute any of the income earned to its members, directors, or officers. A nonprofit can be formed in different ways, including as a:
- Individual enterprise
Working for a nonprofit organization comes with a number of benefits. If the NPO is a corporation, its employees might also have access to group life insurance, health insurance, and pension plans.
IRS Code Section 501(c)
The Internal Revenue Section 501(c) defines nonprofits' tax-exempt status. To be tax-exempt, the organization must be structured as and operate for the sole purposes of:
- Public safety
- Amateur sports
- Prevention of animal cruelty
- Prevention of child cruelty
NPOs can be managed by boards or members. Their business structure can include both compensated and volunteer staff. An NPO should be created to promote one of the following.
- Fine arts
- Environmental concerns
- Victim and welfare advocacy
- Cultural services
Private shareholders or individuals cannot receive nonprofit revenue.
Advantages of Nonprofit Organizations
Nonprofit organizations enjoy many advantages, including:
A nonprofit organization can be in existence for as long as its purpose remains relevant and it can continue to earn revenue. This applies even if the founder has left the organization or passed away. The oldest nonprofit in the world began in Japan more than 1,500 years ago. Because the entity is separate from the person, it can continue on for as long as the need exists. This can make these types of companies attractive to donors who know their cause will continue long-term.
Organization at a Larger Scale
If you have a mission or are driven to make the world a better place, setting up a nonprofit around your chosen cause can allow you to create a larger team or program and, in effect, have a larger impact.
Personal Liability Protection
One of the primary advantages of forming a nonprofit company is that employees will not suffer personal liability for business debts or injury awards in the event of a lawsuit. If a lawsuit was to occur or the business was to default on its debts, the liability will lie with the business and its assets.
Once a nonprofit is formed, it will operate legally as a limited liability organization. This keeps business and personal assets separate from one another. Though owners and founders of NPOs will enjoy limited liability from debts, they are not protected from illegal or responsible acts they participated in. Directors and members are required to perform their job functions to maintain the nonprofit's best interest and can be held liable if they don't.
Even though your nonprofit enjoys liability protection, it is still a good idea to purchase business liability insurance to protect you in situations that fall out of the scope of incorporated laws.
Nonprofit companies enjoy tax exemption when it comes to paying corporate tax, as well as income tax at the federal, state, and city level. This way, you put all your earnings back into the company to provide more services.
Donations to NPOs are tax-deductible, which can make charitable contributions to these organizations more attractive.
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