How Does a Non Profit Work?
The Facts
As of the year 2006, there were 1,084,939 nonprofit organizations in the United States. Of these, 535,930 were public charities, 58,774 were private foundations and 490,235 were categorized as miscellaneous-type nonprofits.
Nonprofit businesses are specifically formed to meet the needs of the public or private sectors by providing a service, an educational means or monetary assistance. A nonprofit must function as a nonprofit entity, using all monies obtained to further the mission of the organization.
Identification
A nonprofit organization must meet certain criteria to be classified as a nonprofit entity. Organizations can be classified as nonprofits on both state and federal levels; however, state and federal requirements differ, and having one classification does not guarantee qualification for the other.
In addition, a nonprofit organization is eligible to receive tax-exempt status on both state and federal levels. This means any expenses required to maintain the business, as well as donations received, are exempt from taxation.
Benefits
The benefits of running a nonprofit organization vary according to purpose and intent at the outset. Meeting an unfilled need in the community should certainly rank within the top five reasons, but there are monetary benefits as well.
Most nonprofits that apply for grants from foundations, and/or earn income through business activities, hold a 501(c)(3) tax status classification. This is a federal exemption that designates all income as tax exempt provided it is used to carry out the working of the organization.
Large contributions, or regular donors who donate large amounts to a 501(c)(3) organization, have the option to use these donations as tax deductions. Oftentimes, this is a big selling point for nonprofits during fund-raising events.
Two other benefits that nonprofit organizations share are (1) the individual assets of each board member are protected should the business fail, and (2) the nonprofit qualifies for special postage rates.
Function
Nonprofit organizations hold many of the same characteristics as for-profit businesses. Nonprofits can negotiate business dealings such as buying property or forming contracts. Nonprofits cannot issue stock to shareholders or pay out dividends on profits made.
Nonprofit organizations can be structured only as membership or board-only. Those structured as memberships elect their board of directors. Regular meetings are held, and organizational procedures and bylaws are developed and/or amended by the membership base.
Board-only structures are made up of the board of directors. A membership base can be present, though the board still delegates what powers are held by the membership base. Board members are self-appointed and are responsible for all organizational procedures, policies and bylaws.
Risk Factors
A common problem that nonprofit organizations encounter is staying afloat, financially. Because most income brought in by nonprofits is donated, or comes from grants, it becomes difficult for the organization to establish a stable business model.
Unpredictable cash flows can leave an organization at odds with fulfilling payroll requirements for hired staff, further expansion efforts and the requirements of normal upkeep on the facility.
