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.