There are so many different types of nonprofit organizations out there with a multitude of purposes. Nonprofit organizations often work with people who need assistance and aren’t able to provide it themselves.
What Is a Nonprofit?
Nonprofit companies are set up for charitable, religious, educational or other specific purposes. These types of organizations aren’t designed to generate a profit for shareholders but rather carry out their purpose as stated in the articles of incorporation.
For example, a nonprofit entity may be created with the mission of providing housing and training for single mothers who want to go back to school and start a career.
Nonprofits are set up in this way because it’s often difficult to raise money for just one cause or purpose. People don’t want to hear that part of their donation will go toward new carpeting, so a nonprofit is able to address multiple needs under one umbrella organization.
What Are Some Types of Nonprofits?
There are many different types of nonprofit entities, all of them with different missions and goals, which is why they have such a wide range of names. Here are just a few:
- Community foundations offer charitable giving to various nonprofits in the surrounding area.
- Animal shelters take care of animals who need homes. There are both private shelters that take in animals from the public and municipal shelters that take pets from their owners.
- Foundations offer assistance to a specific community or group of people. There are even organizations set up for specific ethnic groups, such as Hispanics, Jews and Muslims.
- Nongovernmental organizations work on international issues without any government involvement.
- Educational institutions help students learn a skill or take classes to achieve a degree. Colleges, junior colleges and universities all fall under this category.
- Social services organizations are run by the government for children, individuals and families who need assistance with paying bills, counseling or nutrition education. These groups provide social safety nets for people in need.
The Benefits of Nonprofit Status
For many people, starting a nonprofit is the most logical way to address a need on a local or global level. Some of the benefits of becoming a nonprofit include:
Limited personal liability.
As a nonprofit, you can set up protection from personal liability in the articles of incorporation. This means that as long as you follow your mission statement and do everything within your power to help your cause, you aren’t held personally responsible for any financial damages incurred by the organization.
Eligibility for tax exemption.
Not all types of organizations are eligible for tax exempt nonprofit status, but if your nonprofit falls under one of the categories specified by the Internal Revenue Service, you’ll be able to save a significant amount in taxes on donations.
According to the IRS website, there are various factors that determine whether or not an organization can receive tax exemption: “The tax laws state that charitable organizations should be organized and operated for exempt purposes, which are religious, charitable, scientific, literary or educational. In addition, no part of the net earnings can inure to the benefit of any private shareholder or individual.”
Some foundations only give grants to nonprofit organizations, so if you plan to set up a foundation of your own, obtaining nonprofit status is a good goal.
The National Council on Nonprofit Associations says that grants are typically given based on the following factors:
- Mission/purpose – How does your organization carry out its mission? Does it strive to reduce the effects of poverty in a certain area, for example, or fight for environmental conservation? The mission is what makes your group unique.
- Track record – Your organization’s past efforts to achieve its stated mission are taken into account. Are there similar organizations whose missions your group duplicates? Are you doing something no one else has done before?
If your nonprofit is big enough to have employees, you can offer them some perks. Some nonprofits offer health insurance and savings plans for their workers, which reduces the need for outside help later on.
Additional benefits include paid time off (which can encourage staff board members to make use of their vacation time) and free day care centers at offices so that employees can work after hours.
Ease of fundraising.
If you’re looking to raise money, it’s much easier to do so when your organization has nonprofit status. “Nonprofit” is a great selling point for many people who are ready to donate their time or money.
The National Council on Nonprofits also says that “people with an affinity for nonprofits may be willing to give more generously.”
Your nonprofit corporation will never “go out of business.” This is particularly helpful if you expect your organization to be around for a long period of time, or if you want it to survive even if key staff members leave.
Formal business structure.
In addition to the benefits of a nonprofit, you also gain structure. Your organization will have to hold meetings, keep minutes and follow certain protocols in order to stay on track.
These formal steps aren’t necessary for any type of group, but they can help an organization move forward more efficiently and effectively.
Disadvantages of a Nonprofit Corporation
The advantages of nonprofit organizations are numerous, but there are also some disadvantages that you need to consider.
According to Entrepreneur.com, the process of setting up a nonprofit can be expensive. You will need to pay for lawyers, consultants and other professionals who can help you make sure everything is done correctly.
The fees these experts charge add up quickly but are well worth it if your organization succeeds in the long run.
Lengthy wait times for exemption status.
Getting your nonprofit status is generally an easy process, but it isn’t always swift. If you create a new organization or add the word “nonprofit” to an existing one, check with your state’s secretary of state office regarding the information and documentation that is required.
You should also register with a federal agency like the Internal Revenue Service, which will let your status be known to the public. Some organizations say that getting nonprofit status can take up to a year, but for others it may be much shorter.
“Nonprofit” does not equal income tax exemption.
It is easy to assume that a nonprofit organization will get tax-exempt status. In reality, though, you have to apply for 501(c)(3) status with the IRS once your group gets its nonprofit certification from the state.
The application requires information on where the money goes and what it pays for. Don’t forget to keep proper financial records as well.
Check with your state’s IRS office to make sure you know your responsibilities and what the requirements are for your state.
Directors and officers do not receive profits.
Since nonprofit organizations don’t distribute profit, you won’t get that money either. This is worth remembering when determining salaries for yourself and other staff members.
Extensive paperwork requirements.
Nonprofits are required to provide a great deal of information to the IRS, including a list of current directors and officers, bylaws and financial statements. The upside is that you get organized records for your organization.
Tedious process to apply for grants.
Nonprofit organizations typically have to go through a lengthy process in order to get grants. Expert Business Advice says that it “often requires smaller nonprofit organizations to provide detailed financial projections, descriptions of work plans and project proposals in addition to the general administrative information required by government agencies.”
This can be time-consuming, but particularly worth it because grants take a long time to come through.
Because nonprofit organizations are tax-exempt, your group is subject to public scrutiny. Your statements have to be honest, and you cannot engage in any activities that would jeopardize the status of your organization.
You might also have to open up financial records for inspection to make sure that everything is on the level.
How does the Affordable Care Act affect nonprofit employee benefits?
The Patient Protection and Affordable Care Act (PPACA) changed the way that non-profit organizations are required to offer employee benefits. Employers have a choice between offering coverage through private carriers or created on their own.
Certain employers, specifically non-profits, will be required to provide affordable health insurance options for employees as of January 1st 2014.
Under the PPACA, non-profit organizations with 50 or more full-time equivalent employees must offer affordable health insurance options for their employees.
The law defines an employee as any individual who works at least 30 hours per week and is expected to work this schedule for more than 120 days a year. This proposed rule will not change the eligibility requirements for employees to participate in an organization’s health insurance plan.
With the right attitude and a commitment to your work, starting a nonprofit organization can be rewarding, taking into account all the advantages and disadvantages.
Organizations need leadership in order to succeed, but at the same time there are a lot of legal requirements that need to be met for everything to run smoothly. It’s up to you whether you’re willing to make those commitments or not.