Nonprofit organizations are established to help and support religious or educational causes, or public charities in the community. Forming a nonprofit organization enables you to enjoy the same benefits as a for-profit corporation, but it exempts you from certain taxes.
However, non-profits aren’t without their shortcomings. Read on to understand some of its advantages and disadvantages, especially if you wish to incorporate a nonprofit.
What is a Non-Profit Organization?
A nonprofit organization is a type of business entity that does not earn profits for its owners. Though a nonprofit corporation receives funds from individuals and companies, public and private grants, it uses all of these proceeds to keep itself running and to further pursue its mission and objectives. It also makes profits from sponsorships, donations, the sale of goods and services, and so on.
In a nutshell, a non profit corporation furthers a social cause and provides public aid rather than seek profits for itself. Currently, there are over 1.5 million nonprofits in the United States. Just as with any other business entity, there are several non profit organizations advantages and disadvantages, and here are a few of them
Advantages
1. Tax Exemption
Exemption from taxes is the major advantage of nonprofits. Many nonprofit corporations are granted tax exemption by the Internal Revenue Service (IRS) and as a result, they don’t pay taxes on the received grants, donations, or any other gain earned through fundraising activities.
Many nonprofits are 501(c)(3) organizations based on the section of the tax code [1]. This permits them to be exempted from paying federal or corporate income tax. However, to be exempted from paying taxes, nonprofits need to apply for it through the IRS.
2. Protection from Personal Liability
Under the law, employees and owners of nonprofit organizations are not personally liable for the debts of the organization. Only the nonprofit can be sued for a business-related debt or injury, and the personal assets of its owners are protected. A nonprofit corporation can protect its owners, members, and other employees from personal liability for the nonprofits’ debts, fines, and lawsuits.
However, there are exceptions. Owners/employees of a nonprofit corporation cannot use the organization to hide illegal and irresponsible acts. Also, directors of nonprofits have a fiduciary responsibility. In the case that they fail to perform their responsibilities in the best interest of the organization, which may cause harm to the organization, they can be held liable.
3. Employee Benefits
Nonprofit organizations with enough employees may be qualified for group discounts to health insurance or life insurance benefit programs.
4. Formal Structure
Just like any other business structure, a nonprofit exists as a legal structure in its own right and is separated from its owner(s) and founder(s). A nonprofit is mission-driven and incorporation places this mission above the personal interests of its owner(s), founder(s) or employees.
Disadvantages
1. Takes Time and Money
Creating a nonprofit corporation takes time, money, and effort. For instance, applying for incorporation and exemption requires fees. You may also need to hire the service of an attorney, accountant, or consultant if necessary.
2. Continued Maintenance
As a tax-exempt entity, a nonprofit organization requires continuous maintenance and paperwork to the state, which involves submitting annual filings and complying with all laws of incorporation of the state. All nonprofit organizations are obliged to keep well-documented records and submit annual filings to the IRS and state to keep their tax-exempt status.
3. Limited Personal Control
The personal control of the owners of the organization is limited, as the organization is also subject to other laws and regulations.
For instance, some states require that nonprofits have several directors. These directors are also the only people allowed to appoint or elect the officers that will determine organizational policy. Hence, nonprofits are subject to shared control. It’s not always a good idea to incorporate a nonprofit if you like to have control and make all the decisions.
Now that we’ve considered some of the non profit organizations’ advantages and disadvantages, let’s look at important matters regarding starting a nonprofit.
Important Matters to Consider
Specify the Category Your Nonprofit Status Falls into
You can only enjoy the benefits listed above amidst others if your non-profit is registered as a 501(c)(3) organization. For your nonprofit organization to be registered as one, it must be classified into any of these eight categories: religious, animal welfare, scientific and engineering, literature, amateur athletics, public safety, educational, or charitable organizations.
If you’re not able to specify the category your nonprofit falls into, your application for 501(c)(3) exemption will not be approved by the IRS.
Set Clear Operating Bylaws
Every nonprofit is required by the IRS to specify its articles of incorporation and operating bylaws. You therefore need to set operating bylaws for your corporation. These bylaws are necessary to indicate that the nonprofit is not fraudulent.
FAQ
What are the advantages of a non profit organization?
The advantage of a non profit organization is its tax-exempt status, limited liability, and eligibility to receive public and private grants. Charitable contributions made by people or company to non-profit corporations are tax-deductible, though this is not automatic and you must apply for it. The owners, directors, and employees of a nonprofit are not personally liable for the nonprofit’s debts, though they are not protected from their illegal or irresponsible acts. Another advantage is its eligibility to get grants from public or private sectors, namely, government agencies, people, and foundations.
What problems do nonprofit organizations face?
Some of the problems that nonprofit organizations face include funding difficulty, public scrutiny, and continued management. Most times, founders and employees may get or receive little or no profit.
Can I run a nonprofit from my home?
Yes, you can run a nonprofit from your home depending on what you’re doing. However, it is not professional to run a nonprofit from your home and it may not be allowed by many homeowner’s association. Running a nonprofit from home will not promote transparency and trust among donors.
What defines a nonprofit?
A nonprofit is defined by tax exemption and tax deductibles by the IRS, as well as the provision of public and social benefits.
Conclusion
If you want to incorporate a nonprofit, you will need to think carefully about the benefits and shortcomings. Owners/founders cannot get or receive profits from their nonprofit. However, one of the main benefits is that owners can enjoy tax exemption and favorable tax laws.
They are also usually established to help the community or advance a cause, can be started by anybody who has a legitimate cause or charity, and can either have paid staff and board members or volunteers, or both.
A non-profit organization is as intricate as a profitable corporation, thus, knowing how to keep a record in a corporation is just as important as running a non-profitable entity, as well.
