Not For Profits – Basics

August 23, 2016

A Not For Profit (NFP) organization operates not for the purpose of generating and distributing profits to the owners, but the purpose of generating and distributing profits--i.e. revenue less normal operating expenses--in furtherance of some public good or one or more social causes.

A NFP is not prohibited from generating profits from operations that are donated or distributed to other public good target entities, nor is it prohibited from donating profits to its employees in the form of normal compensation, especially when the NFP would not be physically able to generate the profits needed for donating to other target causes without the efforts of their employees. Sustainability of the NFP is crucial to fulfilling its mission. Note that “sustainability” is achieved from both donated profits that the NFP generates and donates to another entity as well as from donations that the NFP receives.

As noted by NonProfit.pro, a nonprofit serves the public interest. In general, the purpose of this type of organization must be charitable, educational, scientific, religious or literary, and these organizations can be unincorporated or incorporated. An unincorporated nonprofit cannot be given federal tax-exempt status or the designation of being a 501(c)(3) organization as defined by the Internal Revenue Service. When a nonprofit organization is incorporated, it shares many traits with for-profit corporations except that there are no shareholders.

Perhaps the most desirable trait of the NFP is the potential availability of tax exempt status. Among several organizational requirements in order to receive tax exempt status is that the organization must satisfy an “Organizational Test” under the Internal Revenue Code Section 501 (C) (3).

To be organized exclusively for a charitable purpose, the organization must be a corporation (or unincorporated association), community chest, fund, or foundation. A charitable trust is a fund or foundation and will qualify.

However, an individual will not qualify. The organizing documents must limit the organization's purposes to exempt purposes in section 501(c)(3) and must not expressly empower it to engage in activities that are not in furtherance of one or more of those purposes except as an insubstantial part of its activities. This requirement, as noted here by the IRS, may be met if the purposes stated in the organizing documents are limited by reference to section 501(c)(3).

If you are giving thought to starting up a NFP then we highly suggest that attention be given to the following frequently made mistakes, which are nicely summarized in this list from NonProfit:

Poor Initial Research

Research is essential before determining if a need exists for a new organization to address it. Can the need be addressed if you partner with an existing organization?

No Business Plan

An NFP organization is a business. In order to survive, it must have at least as much money coming into the business as it has going out in services and expenses.

Not for a Charitable Purpose

Does it qualify as a charitable cause? If you are unsure, research similar organizations for information.

Failure to Register

Registration of nonprofits is required in most states. Registration protects citizens of states from becoming victims of fraud. Registration of charities, paid solicitors and fundraising counsels help to maintain a responsible environment for charitable work.

Failure to Keep Good Records

As a business, the organization will be required to file various reports of business activity. You just can’t make things up.

No Funding Plan

Raising money is a tough and competitive requirement of most nonprofit organizations. Without funding, there is no way to sustain a nonprofit organization.

Not Complying with IRS Statutes

You must file a federal tax return and you do need to learn what the federal government requires of nonprofit organizations as a trade-off for receiving significant tax breaks by being a 501(c) (3) NPF. The IRS has a website dedicated to exempt organizations.

Misjudging Time Requirements

Running a nonprofit is not a hobby. If you think that you can run a nonprofit organization part-time, you need to have others helping you or you will fail.

Not Building an Effective Board

Leadership is critical and an effective board is one that is composed of talented, dedicated and working people.

Not Investing in Professional Talent

At a minimum, you will need a lawyer and an accountant to help you get started. Having certain systems set up by experienced professionals will save money in the long run.

The foregoing is intended just as a simple overview of the basics involved with starting up and maintaining a Not For Profit organization and is not intended to be all inclusive. We recommend that you refer to the following links in order to further deepen your understanding in this area: