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).

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