What is a 'Nonprofit Organization'

A nonprofit organization is a business granted tax-exempt status by the Internal Revenue Service (IRS). Donations made to a nonprofit organization are typically tax deductible to individuals or businesses that make them, but the nonprofits must make financial and operating information public so that donors are certain their contributions have been used effectively. Nonprofits pay no income tax on the donations they receive or on any money they earn through fundraising activities. Nonprofit organizations are sometimes called NPOs or 501(c)(3) organizations based on the section of the tax code that permits them to operate.

BREAKING DOWN 'Nonprofit Organization'

Nonprofit designation and tax-exempt status is given to an organization that furthers religious, scientific, charitable, educational, literary, public safety or cruelty prevention causes or purposes. It must also generate some public benefit.

Rules, Employment and Examples

A nonprofit organization has paid staff as well as volunteers. Employment taxes, as well as state and federal workplace rules, are typically the same as those for for-profit organizations. Salaries are generally lower, but the type of nonprofit an individual works for makes a significant difference in the pay scale. University presidents and hospital CEOs work for nonprofit organizations and earn salaries comparable to those holding similar roles in for-profit organizations, whereas a person operating an animal rescue typically earns less.

A nonprofit must serve the public in some way, whether through the offering of goods, services or a combination of the two. Clientele often plays an important role in the success and lifespan of a nonprofit organization and customer satisfaction – as well as providing an overall satisfaction in the public area – and is key in keeping the organization’s doors open. Ultimately, like any business, its success relies heavily upon its management and operation.

Examples of nonprofit organizations include hospitals, universities, national charities, churches and foundations.

Nonprofit Versus Not-for-Profit

A not-for-profit organization (NFPO) is a widely based term that encompasses all organizations that are known more specifically as nonprofits, charities, non-governmental organizations (NGOs), civil society organizations (CSOs) and private voluntary organizations (PVOs). It is sometimes more accurate to use the term “not-for-profit” to place emphasis on the organization having the defining criterion of an intention to provide goods and services without seeking profits for private gain. A nonprofit – more broadly a not-for-profit – organization typically makes a profit, either from time-to-time or on a regular basis. This organization uses this profit, however, to further the operations of the organization itself and ultimately to facilitate the provision of benefit to the public at large. The difference between “nonprofit” and “not-for-profit” is largely a matter of semantics. While some groups can use both terms interchangeably, a distinction between the two is that a not-for-profit is an activity that is not intended to generate any profits, such as taking pictures for personal use, while "nonprofit" references an entire organization whose operations/products are not intended to generate a profit (an organization that offers free photography classes).

RELATED TERMS
  1. Not For Profit

    A not-for-profit organization is a type of organization that ...
  2. Unrestricted Net Assets

    Unrestricted net assets are assets donated to nonprofit organizations ...
  3. 501(c)

    A designation under the United States Internal Revenue Code known ...
  4. IRS Publication 557: Tax-Exempt ...

    IRS Publication 557 details the rules and regulations that have ...
  5. Permanently Restricted Assets

    Permanently restricted assets are funds of a nonprofit organization ...
  6. Industrial Organization

    Industrial organization is a field of economics dealing with ...
Related Articles
  1. Insights

    The Pros and Cons of Being a Nonprofit

    Evaluating the tradeoffs organizations face when choosing between becoming a tax-exempt nonprofit or for-profit business with innovative ease.
  2. Taxes

    5 steps to forming a tax-exempt nonprofit corporation

    Learn here the challenges of forming and operating an official nonprofit organization.
  3. Financial Advisor

    Where to Find Non-Profit Finance Jobs

    The non-profit sector offers a stable selection of jobs for those who seek other types of fulfillment from their jobs than just purely financial.
  4. Managing Wealth

    Nonprofit Millionaires

    Many nonprofit CEOs and other top employees are bringing home the big bucks.
  5. Managing Wealth

    How Nonprofits And Commercial Groups Can Help The Economy

    As the White House Summer Jobs Initiative takes effect, we look at the benefits of collaboration between for and nonprofit ventures.
  6. Managing Wealth

    Hybrid Business: Rise of Nonprofits in Private Sector

    Businesses are embracing a mutually beneficial partnership wherein the ideals of the nonprofit sector are coupled with profit motive and capacity to scale.
  7. Taxes

    What IRS Form 1023 Is Used For

    To be treated as a tax-exempt organization, start by filling out this form.
  8. Taxes

    The Top Nonprofit Organizations

    Did you know basketball and volleyball were invented by instructors at a charity?
  9. Personal Finance

    5 Good Reasons To Build A Career In Nonprofits

    There's never been a better time to work in non-profits. The move makes sense at life stages from just starting out to looking for an encore career.
RELATED FAQS
  1. Do nonprofit organizations pay taxes?

    Learn more about section 501 of the IRS tax code, and how it exempts qualified nonprofit organizations from federal taxes ... Read Answer >>
  2. Do nonprofit organizations have working capital?

    Discover why financial reserves in the nonprofit world are equivalent to working capital used by for-profit businesses, and ... Read Answer >>
  3. What is an NGO (Non-Governmental Organization)?

    A non-governmental organization (NGO) is a non-profit, citizen-based group that functions independently of government. NGOs ... Read Answer >>
Trading Center