What is a Nonprofit Organization?

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A nonprofit organization is a corporation, LLC, unincorporated association, or other legal structure formed for not-for-profit purposes. Its not-for-profit purpose is declared when the legal structure is formed. Obtainment of 501(c)(3) or other tax exemption does NOT define whether the organization is a nonprofit.

It is pretty easy to recognize a nonprofit because it is dedicated to an altruistic mission:

  • A public charity such as supporting cancer research or endangered species
  • A private foundation that endows grants to support public charities
  • A religious organization such as a church
  • A fraternal organization such as a homeowners’ association

Even though the organization is called a nonprofit, it should produce profits. (Profits are revenues minus expenses). The distinction between a for-profit and nonprofit is what the organization does with their profits. For-profit businesses distribute profits to their shareholders as a reward for investing in them. Nonprofit organizations reinvest their profits in the cause of the organization. Nonprofits do not pay dividends to investors, but may pay reasonable salaries to employees.

Key Takeaways:

  1. A nonprofit is identified by its legal structure, not its tax exemption status.
  2. You can be a nonprofit organization so long as you are dedicated to committing your profits to the organization’s cause (not the financial benefit of the owners).
  3. You can be a nonprofit organization regardless of whether you apply for or ultimately obtain 501(c)(3) or other tax exemptions.

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