What Is A Nonprofit Organization?

The world of business is often considered to be all about boosting the bottom line and turning a profit. However, if you look a little deeper, you will find that it is also filled with people pushing forward the mission of service to benefit the greater good. In most cases, these types of businesses register as a non-profit organization. As such, a common question arises, which is, “What is a non-profit?”

In an effort to clarify what exactly makes a non-profit different from a for-profit organization, or even a not-for-profit, we’ll share everything you need to know. We will also share the differences between a non-government organization (NGO) and NPO.

What is a Non-Profit?

A non-profit organization (NPO), or foundation, is dedicated to promoting a specific social cause or advocating for a shared group need.

Due to its contribution to society, NPOs receive tax exemptions from the IRS. This is the case as non-profit organizations work to support a religious, educational, literary, charitable, scientific, public safety, or cruelty-prevention purpose.

To receive tax exemption, the business must apply to be registered as a 501(c) entity. Congress has defined roughly three dozen types of nonprofits. However, the common running thread is that a non-profit cannot pay out profits to private individuals or shareholders.

Furthermore, a non-profit organization is different from a non-government organization, or NGO. In 1945, the United Nations coined the term NGO, which refers to a nonprofit that operates beyond the borders of the United States.

While NGOs serve the public and can receive financial aid from the government, their actions and business decisions may not be dictated by the government. Hence, the term “non-governmental.”  It’s also possible for an NGO to be deemed a non-profit organization. This can happen only when the NGO does not distribute its profits to owners or shareholders.

Not-for-Profit (NFPO) vs. Non-Profits (NPO)

Although it’s both easy and common to use the term “not-for-profit” and “non-profit” interchangeably, they are not actually synonyms.

Here’s a look at their similarities and differences:

Not-for-profits:

• Purpose: Supports an activity, community, or cause

• Profits: Used to fund recreation, hobbies, or activities of their goal

• Employees: Volunteers or paid staff

• Stock option: None available
• Tax-exempt: Yes, at both federal and state levels

Non-profits:

• Purpose: Supports charitable, religious, or educational purposes

• Profits: Used to support the organization’s goals, and can also be used to pay salaries and cover administrative costs

• Employees: Volunteers or paid staff

• Stock option: None available
• Tax-exempt: Yes, at both federal and state levels

While there are many similarities between the two, the major differences are in their purposes and usage of profits. A non-profit organization serves the public through goods and services, whereas a not-for-profit organization may just serve a group of members.

Understanding For-Profit vs. Not-for-Profit

Not-for-profit organizations contribute the money it receives to achieve the organization’s goals. It’s also possible for a not-for-profit to receive donations to cover its costs. Not-for-profits must also operate in a designated realm of being a charity that supports a public safety, scientific, or religious purpose.

On the other hand, a for-profit organization receives profits (which come from subtracting expenses from revenue) and then distributes its profits to its owners and shareholders. For-profit businesses are able to work in any sector and for any business goal. These are the types of companies that are traded on the stock market.

As such, they may pay dividends to their shareholders at various times throughout the year or annually. Or, if there are no dividends, then shareholders may benefit from capital gains (or losses), which are lump-sum amounts.

The Types of Non-Profit Organizations

In America, there are various types of NPOs and NFPOs defined by the IRS codes under the category of 501(c). Here’s an example of what these include:

• 501(c)(1): Corporations organized under Act of Congress (i.e. Federal Credit Unions)
• 501(c)(2): Title Holding Corporation for Exempt Organization
• 501(c)(3): Religious, educational, charitable, literary, prevention of cruelty to children or animals organization, etc.
• 501(c)(4): Social welfare organizations and civic leagues, homeowners associations, and volunteer fire companies
• 501(c)(5): Labor unions
• 501(c)(6): Business leagues, Chambers of Commerce, Real Estate Boards
• 501(c)(7): Social and recreational clubs
• 501(c)(8): Fraternal beneficiary societies and associations
• 501(c)(9): Voluntary employees beneficiary associations

Examples of Non-Profit Organizations

Non-profit organizations are geared towards excelling the public good for noncommercial goals, which usually are religious, charitable, or educational.

As such, these types or businesses are often organized as non-profit organizations:

• Public charities
• Social advocacy groups
• Schools and universities (like the University of the People)
• Food banks
• Foundations
• Churches
• Trade and professional organizations

Within the category of 501(c)(3) organizations, there can be either public charities or private foundations.

The difference here is that public charities’ main source of funding comes from the support of the public and/or government.

On the other hand, private foundations receive grants and distribute the funds to serve the public good. Private foundations cannot partake in direct lobbying activities. Both contributions to public charities and private foundations are considered to be tax deductible.

What Does a Non-Profit Organization Do?

Every non-profit has their own set of goals, just like a for-profit business would. However, it’s clear to see that the commonality between non-profits is geared towards helping others and boosting the greater good.

Non-profit organizations achieve the latter by:

• Educating donors
• Connecting people in communities
• Fundraising money
• Spearheading research
• Raising awareness
• Defining and serving public needs

The Bottom Line

The world is a better place because of the array of non-profit organizations in existence.

Non-profit organizations rely on the aid of donors by way of charitable contributions. Although non-profits do of course turn profits, they do not distribute profits.

Instead, they use these funds to further the organization by way of paying staff or covering operating expenses. As such, they receive tax exemptions from the IRS because of the benefits they deliver to society.