What is Not-For-Profit Organization?
A Not-for-profit organization is set up for any social, religious, educational or public service purpose wherein the motive is not to earn profits, however, any profits earned during the course of business are donated to achieve the organization’s goals.
The main purpose of setting up any business is to earn profits. But there are certain organizations that are set up with the motive to provide service to its members or to the general public which are called Not-for-profit organizations. These organizations need to apply for tax-exemptTax-exemptTax-exempt refers to excluding an individual's or corporation's income, property or transaction from the tax liability imposed by the federal, local or state government. These exemptions either allow total relief from the taxes or provide reduced rates or charge tax on some items only. status. This status grants exemption from most forms of taxation like sales taxSales TaxThe government levies sales tax on the consumption of various goods and services as the percentage added to the product and services from which the government earns revenue and does the company's welfare. In the United States, 38 different states have different taxes, from Alaska (1.76%) to Tennessee (9.45%)., property tax.
Types of Not for Profit Organizations
#1 – Private and Public Charities
Most of these organizations are registered under section 501(c)(3) of tax code. This section applies to charitable, religious, educational, scientific, literary, testing for public safety, to foster national or international amateur sports competition, or prevention of cruelty to children or animals organizations, according to the Internal Revenue Service. These are further classified into two categories, Private Charities, and Public Charities. Private charities are run by private individuals and Public foundations are run by larger groups such as schools, hospitals, and churches.
#2 – Not for Profits Created by Government
These type of organizations falls under section 501(c)(1) of tax code. These organizations are ‘created by the act of Congress’.
#3 – Beneficiary Societies and Organizations
These are the small group of people working together to help its members and society. Like a group of teachers providing free education.
Difference Between Not-for-Profit and For-Profits Organizations
- As the name suggests, the For-Profits organization’s main aim is to maximize its profits. Not for Profits’ aim is not to maximize profits.
- For-profits organization’s profits are distributed to its shareholder’s/owners. This organization’s profits are invested back into the business to achieve its goals.
- Not-for-profit organizations are exempt from paying taxes but profit organizations have to pay taxes on their income.
- For-Profit organizations can diversify their business and engage themselves into a huge range of activities but not for profit have to operate as per the objectives for which they were formed.
- The sole purpose of not for profits is to serve the society. For them, society comes first and personal motive comes next. Which is opposite in the case of for-profits organizations.
- The financial Statements of for-profit include Income StatementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements., Balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company., and Cash flow statementCash Flow StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities.. Not for profits has to prepare Receipt and Payment Account, Income and Expenditure Account and Balance Sheet.
- Tax Exemption: These organizations are exempted to pay taxes, hence all the income is diverted to business to achieve its goals.
- Government Grants: It is one of the biggest sources of income since these organizations work for the betterment of society so they get government favors.
- Tax-Deductible Donations: The donations given by individuals to these organizations are often tax-deductible, so this is another incentive for the people to contribute to these organizations.
- Personal Satisfaction: Working for society and social welfare provide a sense of fulfillment and personal satisfaction to the people working for it.
- Limited Liability: It has limited liabilityLimited LiabilityLimited liability refers to that legal structure where the owners' or investors' personal assets are not at stake. Their accountability for business loss or debt doesn't exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies. i.e. the board membersBoard MembersBoard members comprise the individuals whom the shareholders elect as their representatives. They are responsible for taking crucial corporate decisions regarding the company's policies, dividend payouts, top-level managers' recruitment or layoff and executive compensation. are not personally liable for any organization’s debts and liabilities.
Not-for-profit organizations are set up for a social cause. There is no profit-earning motive. Anyone who wants to serve society and has an idea can put up a business plan; decide the objectives and how to achieve its objectives. Not for profit and Nonprofit are both set up for not working for profit. However, there are some differences. Nonprofit is a bigger term and include not for profit organization.
This has been a guide What is Not for Profit Organization & its Definition. Here we discuss its types along with the benefits and differences between not for profit and for-profit organizations. You can learn more about from the following articles –