A nonprofit organization is an entity formed to meet a specific tax-exempt purpose aimed at benefiting the public, a specific group of individuals or the membership of the nonprofit. Nonprofit organizations are prohibited from generating revenue, but instead excess revenues are put back into the operation of the organization – they are not disseminated to owners or investors.

Many of the most familiar nonprofit organizations are 501(c)(3) charitable organizations.

Mission and Tax-Exempt Status

Nonprofits are normally organized around social causes or to serve the public good in ways that government agencies cannot. The mission statements of nonprofits are often tied to specific goals in areas like public welfare, public safety, religion, science, education, art, environmental protection or aid for the less fortunate. A nonprofit may also be created to further non-charitable pursuits like sports or hobbies. For example, nonprofit organizations are created to offer accreditation and pursue research.

Nonprofit organizations are granted tax-exempt status by the U.S. Internal Revenue Service (IRS) and generally do not pay income taxes on the donations received or money earned through fundraising activities. However, an organization may have to pay federal taxes on income that is unrelated to their mission. In addition, employee taxes generally apply the same to non-profit organizations as for-profit organizations.

Nonprofits are limited by the "non-distribution constraint" - all their revenue after expenses must be devoted to furthering the organization's mission. Excess revenue can't be recognized as a profit or paid out as dividends to investors.

The donations made to nonprofits are typically tax deductible, but the nonprofits must make financial and operating information public so donors can see how effectively their contributions are being used.

In organizational structure, a nonprofit generally takes the form of a corporation, but it can also be registered as an endowment, an individual enterprise, an unincorporated association, a partnership, a foundation, a trusteeship or some other type of entity as defined by individual state law. It must be designated as a nonprofit when it is created, and it is only allowed to conduct the business specified in statutes covering nonprofit organizations.

Is Nonprofit the Same as Not for Profit?

In most cases the difference between the terms nonprofit and not for profit are not significant and the terms can be used interchangeably. While in in some jurisdictions there may be accounting and legal differences between the two terms, “not for profit” is generally a broader term that can include nonprofit organizations. The term “not for profit” generally refers broadly to an activity that does not generate profits, and many types of organizations can be considered “not for profit”.

Start a Nonprofit Organization

The process of starting a nonprofit organization is complicated and more detailed information can be found here and here. However, here is a summary of general steps:

  1. Draft your mission statement explaining your purpose and how you will serve a particular group.
  2. Write a business plan on how to achieve your mission.
  3. Create your board and assign roles and legal responsibilities.​
  4. Incorporate your nonprofit by filing the articles of incorporation with the state in which your program or services will be conducted.
  5. File for tax-exempt status (for 501(c)(3) organizations typically the fee will be $400 or $850 depending on your projected income over the next four years.)
  6. Register with your state's agency that is in charge of charitable organizations and charitable solicitations (and other states where you will solicit contributions).
  7. Prepare applicable annual reporting requirements, such as Form 990 with the IRS which shows your finances, activities, governance process, directors, and key staff. Some states may have their own reporting and renewal requirements as well.

Why to Incorporate as a Nonprofit Organization

If your organization is granted nonprofit status at the state and federal level, you can operate with taxes and other restrictions either exempted or significantly reduced in comparison to for-profit companies. State laws relating to the operation of nonprofits vary broadly, though. State law also specifies how your organization will be able to ask for donations and what kind of accreditations, licenses, or permits you will need.

Donations made to nonprofit organizations are normally tax exempt. Individuals and businesses can gain tax advantages through deductions made to nonprofits. There are also tax benefits for supporters.

In some states, there are differences in how your organization is treated based on whether its goals are charitable or merely social. These rules are normally handled by the Secretary of State's office.

It is also important to note that employment taxes, as well as state and federal workplace rules, are typically the same as those for for-profit organizations.

Types of Nonprofit Organizations

There are many types of nonprofit organizations under federal law – the most common of which are 501(c)(3) organizations. To be exempt under section 501(c)(3) the organization must be organized and operated exclusively for certain purposes including charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports competition, or preventing cruelty to children or animals. These organizations also are subject to limitations on political and legislative activities. Organizations established under 501(c)(3) are frequently referend to as charitable organizations.

Other types of nonprofits include, but are not limited to:

  • 501(c)(4) – Civic Leagues, Social Welfare Organizations, and Local Associations of Employees
  • 501(c)(5) – Labor, Agricultural and Horticultural Organizations
  • 501(c)(6) – Business Leagues, Chambers of Commerce, Real Estate Boards, etc.
  • 501(c)(7) – Social and Recreational Clubs
  • 501(c)(8) – Fraternal Beneficiary Societies and Associations
  • 501(c)(9) – Voluntary Employee Beneficiary Associations
  • 501(c)(10) – Domestic Fraternal Societies and Associations
  • 501(c)(11) – Teachers' Retirement Fund Associations
  • 501(c)(23) – Veterans Organization

Examples that Meet the Definition of a Nonprofit Organization

There are more than 1.6 million nonprofits in the U.S. Here are some of the most active and well-known, followed by their primary goals:

Amnesty International – prevents grave abuses of human rights.

The Bill and Melinda Gates Foundation – enhances global healthcare, reduces extreme poverty and expands access to information technology.

The Howard Hughes Medical Institute – funds biological and medical research.

The Red Cross – protects human life and health, and alleviates human suffering.

Rotary International – brings together business leaders to provide humanitarian services.

UNESCO – promotes international collaboration through educational, scientific, and cultural reforms.

The United Way – pools efforts in fundraising and support for charitable organizations.

World Wide Fund for Nature – promotes wilderness preservation and the reduction of humanity's footprint on the environment.

Legal Advice on Nonprofit Organizations

If you want to explore whether nonprofit status is right for your organization, or any other issues related to incorporation, contact the legal professionals in the UpCounsel marketplace. Any mistake could be expensive in terms of time, money and reputation. At UpCounsel, you'll find up-to-the-minute advice from top lawyers who average 14 years of legal experience. Our lawyers have provided legal services to successful enterprises such as Stripe and Google. Talk to UpCounsel before you make a move.