What is a Nonprofit Organization?

What is a nonprofit organization?

You’ve probably encountered nonprofits your whole life. Perhaps you donate regularly to a nonprofit charity like the Salvation Army. Maybe you’ve volunteered for your local community theater. It’s even possible you’ve applied for a job at a nonprofit organization without knowing it.

But how do nonprofits work — and what makes them different from for-profit companies?

Nonprofit Organization Definition

A nonprofit organization (NPO) is a group that is tax-exempt under the Internal Revenue Code Section 501 (c) (3).

That just means nonprofits don’t pay taxes on donations or money earned from fundraising since they’re not formed for private interests but to provide a public benefit.

While there are other tax-exempt organizations, only 501 (c) (3) organizations can offer tax deductions for donations they receive.

All nonprofit organizations, from Goodwill to your local animal shelter, fall under this definition.

What Do Nonprofit Organizations Do?

So, what “public benefits” do nonprofit organizations provide?

Plenty! You’ve probably heard of human service nonprofit organizations like the American Red Cross. They provide disaster relief – including shelter, food, medical, and mental health services – for places hit by fires, floods, and other tragedies.

Other nonprofits like the Humane Society work to end cruelty toward animals. This can include stopping cosmetic testing on animals or finding homes for abandoned pets.

Nonprofit organizations like the Museum of Modern Art provide a different benefit – furthering the public’s awareness of art by showcasing the work of artists like Vincent Van Gough and Andy Warhol.

Other nonprofit organizations serve different social causes including:

• Education Groups
• Health Services
• Community and Civil Rights Groups
• Religion-related organizations
• International Development and Human Rights Groups

Can Nonprofit Organizations Make Money?

One big myth about nonprofits is that they can’t earn a profit from their businesses.

Actually, not only do many nonprofits earn a profit, they should earn a profit.

Think about it. Nonprofits, like all businesses, have operating expenses – from rent, to office supplies, to electric bills.

Beyond that, nonprofits have unique expenses. An education nonprofit may need funds for school scholarships and grants. A nonprofit that feeds the homeless will have a huge grocery bill.

Nonprofits pay for these expenses through fundraising activities like donation drives, raffles, charity dinners etc.

If the income generated exceeds a nonprofit’s expenses, it earns a profit. This profit can then fund the nonprofit’s activities in the future.

As long as the activities that generated any profit are directly related to the nonprofit’s mission, the nonprofit can’t be taxed on this money.

However, if the nonprofit makes money from “unrelated” activities (for instance, by renting its office space to other businesses), that profit can be taxed like normal business income.

The IRS does offer an exemption on some “unrelated” activities. For instance, Salvation Army thrift stores are not taxed since their merchandise is largely donated.

Regardless, any money a nonprofit earns must go into paying its operating costs and cannot benefit a private individual (like an owner or shareholder).

So does this mean people who work for nonprofits can’t be paid?

Not at all! Read on.

Working for a Nonprofit

Another big myth about nonprofits is that their workers are all unpaid volunteers.

The truth is, nonprofits provide millions of people with paid employment. According to a 2019 report by the Center for Civil Society Studies at Johns Hopkins University, nonprofits employed 12.3 million people in the U.S. in 2016!

These employees provide many services – from accounting, to marketing, to management – and are all paid wages (which are considered part of the nonprofit’s operating costs).

Like for-profit companies, nonprofit organizations must comply with federal and state wage and hour laws for how they pay their employees. Many of these paid positions also come with a nice benefits package – including medical, dental, vision, and retirement.

Volunteering for a Nonprofit

Of course, nonprofits also need volunteers to help support successful programs. This help takes many forms – you may find yourself volunteering by reading to children in literacy programs or passing out food to people in disaster areas.

And while volunteers don’t receive monetary compensation, volunteering your time offers many health benefits including strengthening your body, improving your mood, and lessening stress.

Beyond that, many volunteers find that donating their time to nonprofit organizations is fun, helps them meet like-minded people, and can improve their skills in leadership and problem solving.

Volunteering at a nonprofit can also lead to paid employment, through networking opportunities and the possibility of finding a salaried position at a nonprofit organization.

Finding Out More About Nonprofit Organizations

Okay, so now that you know more about what a nonprofit organization is and the opportunities it can offer, how do you find a nonprofit you want to support?

One place to start is GuideStar. This is a database that collects and shares information about thousands of U.S. nonprofits.

You can search for nonprofits by category or name to find an organization that matches your interests. If the organization has updated its profile, you can also find information on the nonprofit’s programs, financials, and business operations.

Conclusion

Nonprofits provide many benefits, both to the communities they serve as well as the people who work and volunteer for them.

Over to you – what are your favorite nonprofit organizations and how do you want to support them?