Disadvantages of Nonprofit Status

Disadvantages of Nonprofit Status

One of the most important things to know about a nonprofit organization is that it is not owned by its founders. Unlike a private business that can be sold after it has grown big and profitable, a nonprofit organization belongs to the public at large. If it dissolves, generally its assets must be given to another nonprofit organization that has a stated business purpose that is as similar as possible to the dissolved nonprofit's purpose. If its assets are misapplied or used for private benefit by the officers, the state attorney general (or a similar official) can seize them.

Limited Purposes

In order to be exempt under the tax laws, a nonprofit organization can only perform certain functions listed in those laws. If it goes outside those limits, the nonprofit may have to pay taxes on some of its income, pay penalties, or lose its exemption entirely.

Lobbying

Most types of tax-exempt, nonprofit organizations are forbidden from contributing to political campaigns and may only do a limited amount of lobbying.

Public Scrutiny

Another disadvantage is public scrutiny. Because a nonprofit organization is dedicated to the public, its finances are open to public inspection. This means that the public can obtain copies of any nonprofit's tax returns, and can find out its salaries and other expenditures.

Under IRS regulations, you must provide any member of the public who requests it with a copy of your application for tax exemption (Form 1023 or 1024) and copies of your nonprofit’s recent tax returns (Form 990 or 990-EZ). You can charge a reasonable fee for the cost of copying and delivering them.

  • Definition of a Nonprofit Corporation
    A Nonprofit corporation is a special type of corporation that has been organized to meet specific tax-exempt purposes. To qualify for Nonprofit status, your corporation must be formed to benefit: (1) the public, (2) a specific group of individuals, or (3) the membership of the Nonprofit. Examples...
    read more
  • Reasons to Form a Nonprofit Corporation
    As someone involved with a charitable cause, you might be weighing the benefits of formally organizing your nonprofit. While it might take a little extra work, only with a state-recognized nonprofit corporation can you obtain private and public grants, low-cost postage rates and be exempt from...
    read more
  • Comparing a Nonprofit to an LLC or Corporation
    Nonprofit corporations enjoy the same liability protection as regular corporations and limited liability companies. In other words, your directors, trustees, members, and employees are not generally responsible for corporate debts and liabilities. There are also significant federal and state tax...
    read more
  • Tax Exemption for Nonprofits
    Forming a nonprofit corporation with your state does not automatically qualify you for federal tax exemption with the IRS. Once you have created your nonprofit by filing the necessary documents with your state, if you want federal tax exemption, you must file a separate application with the IRS....
    read more
  • Commercial Rights of Nonprofits
    The fact that a corporation is a nonprofit does NOT mean the corporation cannot sell goods or services for money. In fact, many nonprofits make money selling everything from clothing to medical services. A nonprofit can pay salaries to officers and employees. But, in order to maintain nonprofit...
    read more
  • Managing a Nonprofit Corporation
    Directors are responsible for the management and operation of a nonprofit corporation. Nonprofit directors can serve with or without compensation. If you decide to compensate directors, remember that compensation must be deemed "reasonable" by the IRS. Directors are under the same constraints of...
    read more