Non Profit Organizations Overview
Non-profit organizations, also known as not-for-profit organizations, are groups established to benefit a particular issue or endeavor. There are over 1.4 million non-profit organizations operating worldwide and thousands of new organizations are formed daily. Unlike commercial enterprises, non-profit organizations do not operate to generate income, and do not distribute earnings to the organization's members, directors, or officers.
Types of Non-Profit Organizations
Non-profit organizations are established to serve a number of different charitable and non-charitable purposes. Common examples of non-profit organizations include public foundations, public schools and universities, public hospitals, political organizations, professional associations, labor unions, museums, and research institutions.
Forming a Non-Profit Organization
A not-for-profit organization may be organized informally, or as a corporation, trust, unincorporated association, partnership, or condominium. Non-profit organizations are typically organized under state law. Some groups, however, including the American Red Cross and the Boy Scouts of America, are chartered by the federal government.
Funding a Non-Profit Organization
Because non-profit organizations do not operate to generate income, they are typically funded by outside sources. Most non-profit organizations are funded by private and public donations, grants and fellowships. In order to maintain their activities, non-profit organizations must often devote a substantial amount of time to fundraising activities.
Regulation of Non-Profit Organizations
Typically, non-profit organizations are governed by the same laws that regulate for-profit corporations, associations, partnerships, etc. For example, non-profit corporations are required to file articles of incorporation with the appropriate state agency, draft bylaws, name directors and officers, and file annual reports. Once a non-profit corporation is formed, it is subject to the same limited liability protection as for-profit corporations.
Several states have adopted specific legislation to govern non-profit organizations, including the Revised Model Non-Profit Corporation Act and the Uniform Unincorporated Non-Profit Association Act. Other states have partially or fully limited the tort liability of not-for-profit organizations.
Tax Implications of Incorporating Non-Profit Organizations
Many non-profit organizations qualify as tax-exempt entities under state and federal tax laws. Typically, state laws require tax-exempt non-profit organizations to fulfill two requirements. First, the organization must state in its articles of incorporation or association that no part of the organization's assets shall benefit any of its members, directors, officers, or agents. Thus, while a non-profit organization may pay its employees, any excess revenue must be used to further the organization's activities. Second, the non-profit organization must have a legal, charitable purpose. Accordingly, certain organizations, such as non-profit professional associations, are not eligible to receive a tax exemption.
The Internal Revenue Service (IRS) offers federal income tax exemptions to certain non-profit corporations. The most common federal tax exemption is found in Section 501(c)(3) of the Internal Revenue Code (IRC). A corporation may obtain tax-exempt status under Section 501(c)(3) if the corporation serves a charitable or literary purpose, or qualifies as a religious group, scientific organization, or educational organization. If the IRS finds that a tax-exempt organization has engaged in an activity that excessively benefits an individual member of the organization, the IRS may revoke the organization's tax-exempt status or subject the organization to a fine.
Tax Implications of Donating to a Non-Profit Organization
Those who donate money to a non-profit organization may receive substantial tax benefits. Under 26 U.S.C. 170, an individual may deduct from their income taxes any donations made to non-profit organizations recognized under IRC 501(c)(3).