• Charity
• The Environment
• Humanitarian Aid
• Education
• Animal Protection
• The Arts
• Wildlife Conservation
• Social Issues
• Health care
• Medical aid
• Religion
• Research
• Science
• Sports
• Any other admirable or public purpose.

 
A nonprofit organization does not simply refer to an organization that cannot generate a profit, it means that it can only earn a profit at the entity level and may not be passed on to its board of directors, officers or members. The profit reorganization must be used for a charitable or public purpose.  A nonprofit entity may legally and ethically run a trade or business that generates a profit or hold investments, however, the profit must be used exclusively for attaining the organizations goals.  A nonprofit entity is generally exempt from taxation, with certain exceptions.

Advantages & Benefits

Tax exemption is one of the principal benefits for non-profit organizations. Tax exemption enables the organization to operate without federal (and perhaps state) income tax.  This benefit often enhances the organization’s ability to accumulate income and assets and can, therefore, the more productive over the long-term. 

A second primary benefit to a tax-exempt entity is that charitable contributions to a 501(c)(3) organization are tax-deductible.  If an organization has obtained IRC Section 501(c)(3) tax exempt status, an individual or company’s charitable contributions to this entity are tax-deductible.

Organizations must apply to the Internal Revenue Service for such status as not all non-profit organizations qualify for tax exemption. Qualification as a non-profit organization is defined by state law, while qualification for tax exemption is largely determined by federal tax law. Tax exemption does not apply to employment or payroll taxes. Conditions such as the tax exempt purpose, complying with limitations on spending and an internal safeguard for a charity must be met to be issued an authorization letter of tax-exempt status. Failure to maintain operations to the laws may result in an organization losing its tax exempt status.

There are benefits of organizing a non-profit organization as a corporation.   Limitation on personal liability is a significant benefit in organizations of the corporate form. If the corporation is found liable for damages, the liability is generally confined to the corporation. The directors and officers of the organization are generally not held liable for the wrongdoing of the corporation, where as unincorporated associations do not have this protection available. However, organizations that are incorporated are required to file organizational documents and annual reports with the state.  These documents are a matter of public record.

Disadvantages

The cost of a non-profit organization is one of its principal disadvantages.  Because a non-profit is a legal entity, the use of an attorney or accountant is necessary as the rules and regulations are complex.  While tax exemption is one of the advantages of qualified non-profits, the fee of incorporation and application for exemption is a disadvantage. These costs are not the same for every entity.  With the corporate form of non-profit organizations, filing with the state is required. The cost of annual reporting requirements is also a disadvantage.

In creating non-profits, personal control is limited.  In some cases the organization’s directors are the only people allowed to elect officers and to determine corporate policies. Non-profits are subject to federal and state laws and regulations along with its own articles of incorporation and bylaws, which again limits personal control over the non-profit entity.

As a non-profit organization is dedicated to charity or the public, its finances are also open to inspection by the public. The public may obtain copies of the non-profit organization’s expense and salary reports as well as state and federal filings.

Certain detailed documents including financial records, articles of incorporation, bylaws and annual reports, as required by the state in which it is incorporated, must be prepared in a specific manner and filed by certain deadlines.

Problem Areas

There are many ongoing problems faced by non-profit organizations. Congress and the IRS perceive a great deal of fraud in the area of charitable giving and have a great deal of concern about taxpayers avoiding their legal obligations. As a result, the Pension Act of 2006 details the significant changes in the laws that deals with charitable organizations. These recent tax law changes are broadly ranged into several categories:

• Greatly increased information sharing between the IRS and state governments on exempt organizations.

• Greatly increased regulation and scrutiny of donor-advised funds.

• Greatly increased regulation and scrutiny of supporting organizations.

• Increased and more detailed reporting requirements in charitable information returns, including Form 990, with reporting requirements extended to more charitable organizations.

• Increased penalties for self-dealing, excess benefit transactions, fraud and abuse.

• Increased reporting and scrutiny of in-kind and cash donations, with greater requirements for appraisals and receipts.