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What is 'Not For Profit'

Not for profit describes a type of organization that does not earn profits for its owners. All of the money earned by or donated to a not-for-profit organization is used in pursuing the organization's objectives and keeping it running. Typically, not-for-profit organizations are charities or other types of public service organizations.

BREAKING DOWN 'Not For Profit'

Not-for-profit organizations can apply for a tax exempt status so the organization is not subject to most forms of taxation. Donations made to a tax-exempt, not-for-profit organization may also be tax deductible for the donor.

How to Start a Not for Profit Organization

Almost anyone can start a not for profit. If a person sees a need in their community or elsewhere in the world, he can research his idea and put together a business plan, outlining the proposed non-profit's objectives and how it plans to meet those goals. To achieve tax-exempt status, the organization needs request 501(C)(3) status from the Internal Revenue Service (IRS). If desired, the not-for-profit can also opt to incorporate. Once registered and running, the organization has to maintain compliance with the appropriate state agency regulating charitable organizations.

Differences Between For-Profits and Not-for-Profits 

Aside from the distinguishing feature that a not-for-profit organization does not distribute profits to it owners, many nonprofits have much in common with for-profit organizations. For example, while some not-for-profit organizations use only volunteer labor, many large or even medium-size non-profits are likely to require a staff of paid full-time employees, managers and directors. Indeed, since not-for-profit enterprises wish to accomplish their objectives in the same way as for-profit enterprises, business tactics and management techniques honed in the for-profit world often work well in not-for-profit organizations as well.

Finally, while for-profit businesses can engage in a huge range of activities, not-for-profit businesses must operate exclusively as a charity or for scientific, religious or public safety purposes. Additionally, not for profits may also exist to collect income to dispense to other qualifying charities.

Do Not-for-Profit Organizations Pay Taxes?

Not-for-profit organizations do not pay sales tax or property taxes. For example, if a church is established as a not-for-profit organization, it does not pay property taxes on the house of worship it owns. Similarly, if a not-for-profit charity accepts clothing donations, sells the clothing and uses the money for its charitable purposes, it does not pay property tax on the building used as its store. However, not-for-profit organizations must remit payroll taxes on behalf of their employees. Similarly, the employees and directors who receive income from a not-for-profit must report the payment as income.

 

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