What is a Nonprofit?

What is a Nonprofit?

A nonprofit organization is one that does not pass its income to its members or shareholders, but instead uses the income to further a goal that benefits the community or some part of the community.

This does not mean that the operations of a nonprofit cannot be profitable. Many nonprofit organizations make large profits on their operations, but those profits cannot benefit private parties. They must be used to further the organization's stated goal. If a nonprofit disbands, no one except another qualified nonprofit organization (with goals as similar as possible) can take over its assets.

Advantages of Nonprofit Status

There are four main advantages to being a nonprofit organization rather than an ordinary business: tax exemptions; the ability to receive tax-deductible donations; the ability to qualify for grants; and, the lower costs for such things as postage, advertising, and filing fees.

Tax Exemption

For many nonprofits, the tax exemptions are the most important benefits. Several exemptions from taxes are available, depending on the type of organization and the state in which it is located.

Income received by a nonprofit is not subject to income tax at either the state or federal level if it successfully applies for and is granted an exemption. In most states, nonprofits can get an exemption from paying sales and use taxes on items that the organization purchases. Also, many nonprofits do not have to pay property taxes on the real estate they own. Again, they must apply for, and be granted, the exemption.

Deductibility of Contributions

Perhaps more important than being tax-exempt, contributions made by taxpayers to certain types of nonprofits are deductible on the taxpayer's income tax return. This is a big incentive for others to give to an organization.

Grants

Being a nonprofit organization makes the company eligible for both private and government grants. There are many large foundations that are required by law to give away a percentage of their assets each year, but they can only do so to qualified nonprofit organizations.

Lower Costs

The postal service offers special rates to nonprofit organizations that are much lower than the normal rates. Some newspapers, magazines, radio stations, and other media give discounted advertising rates to nonprofits. In some cases it is even possible for nonprofit organizations to advertise for free. These free advertisements are known as public service announcements.

Tax-Exempt Bonds

Some types of nonprofit organizations are able to raise money by issuing tax-exempt bonds, which are similar to municipal bonds. This is usually done by organizations that need to finance multimillion-dollar facilities, like hospitals.