Nonprofit Organizations

Nonprofit organizations are institutions that conduct their affairs for the purpose of assisting other individuals, groups, or causes rather than garnering profits for themselves. Nonprofit groups have no shareholders; do not distribute profits in a way that benefits members, directors, or other individuals in their private capacity; and (often) receive exemption from various taxes in recognition of their contributions to bettering the general social fabric of the community.

Nonprofit groups "are as diverse as the National Football League, Harvard University, and Fannie Mae. A third of these organizations are churches," Roz Ayres-Williams wrote in Black Enterprise. "Because nonprofits cover so many fields of interest—charity, religion, health, science, literature, wildlife protection, the arts, even sports—it's easy to find a niche, whatever your calling."

Nonprofit organizations are far more important to the overall U.S. economy than is generally recognized. Indeed, some sources indicate that the sum total of nonprofit groups comprise a third sector of the American economy, along with the private (business) and public (government) sectors. According to a report published by the National Center for Charitable Statistics there were just shy of 1.4 million nonprofit organizations active in the U.S. in 2004, 59 percent were public charities, and 41 percent private foundations.

TYPES OF NONPROFIT ORGANIZATIONS

A wide range of charitable and other institutions are classified as nonprofit organizations under the Internal Revenue Code. Many of these qualify under the definition provided in Section 501(c)(3) of the Code, which stipulates that all of the following qualify for tax-exempt status: "Corporations, and any community chest, fund or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, to foster certain national or international amateur sports competition, or for the prevention of cruelty to children or animals," provided that the institutions adhere to basic standards of behavior and requirements of net earnings allocation.

Charitable Organizations

Charitable institutions comprise the bulk of America's nonprofit organizations. These include a wide variety of institutions involved in the realms of poverty assistance (soup kitchens, counseling centers, homeless shelters, etc.); religion (churches and their ancillary possessions, such as cemeteries, radio stations, etc.); science (independent research institutions, universities); health (hospitals, clinics, nursing homes, treatment centers); education (libraries, museums, schools, universities, and other institutions); promotion of social welfare; preservation of natural resources; and promotion of theatre, music, and other fine arts.

Advocacy Organizations

"These groups attempt to influence the legislative process and/or the political process, or otherwise champion particular positions," explained Bruce R. Hopkins in The Law of Tax-Exempt Organizations. "They may call themselves 'social welfare organizations' or perhaps 'political action committees.' Not all advocacy is lobbying and not all political activity is political campaign activity. Some of this type of program can be accomplished through a charitable organization, but that outcome is rare where advocacy is the organization's primary undertaking."

Membership Groups

This kind of nonprofit organization includes business associations, veterans' groups, and fraternal organizations.

Social/Recreational Organizations

Country clubs, hobby and garden clubs, college and university fraternity and sorority organizations, and sports tournament organizations all can qualify as nonprofit organizations, provided that they adhere to basic guidelines of net earnings distribution, etc. Unlike other tax-exempt organizations, however, their investment income is taxable.

"Satellite" Organizations

Hopkins pointed out that "some nonprofit organizations are deliberately organized as auxiliaries or subsidiaries of other organizations." Such organizations include cooperatives, retirement and other employee benefit funds, and title-holding companies.

Employee Benefit Funds

Some profit-sharing and retirement programs can qualify for tax-exempt status.

ADVANTAGES AND DISADVANTAGES OF INCORPORATING

All nonprofit organizations are faced with the decision of whether or not to incorporate. As Ted Nicholas noted in The Complete Guide to Nonprofit Corporations, there are many benefits associated with incorporating: "Some are the same as those commonly enjoyed by for-profit business corporations. Others are unique to the nonprofit corporation. Perhaps the greatest advantages of all—granted exclusively to organizations with bona fide nonprofit status—is exemption from taxes at federal, state, and local levels." In addition to tax exemption, Nicholas cited the following as principal advantages of forming a nonprofit corporation: