The goal of any nonprofit is to address a concern or provide a service without looking for a profit in return. If the nonprofit organization also receives tax-exempt status, it will not have to pay income taxes on any money it raises for its work. Being tax-exempt means not having to pay taxes.
The following kinds of organizations may be tax-exempt:
Section 170 of the Internal Revenue Code (IRC) provides that donations to certain nonprofit organizations are also tax deductible for the person making the donation. Section 501 of the IRC gives more information about the taxes for nonprofit organizations.
Differences between a nonprofit and a for-profit business
Most nonprofits have several things in common:
- They are created for educational, charitable, religious, scientific or literary reasons;
- They must be a nonprofit corporation or a trust;
- They are not owned by any one person or group; and
- They are managed by a board of directors of at least three people who are not related.
Most for-profits have several things in common:
- They are created to make money for the owners;
- They can be a sole proprietorship, corporation, partnership, or limited liability company (LLC);
- They are owned by the person or group that starts it; and
- They are managed by its owners.
Profits in nonprofit and for-profit businesses
Both kinds of organizations must make some money in order to pay the bills. The money that a nonprofit organization makes is used to pay all the costs of its programs. Any extra money is used to improve or expand those programs. In a for-profit business the income is used to pay the bills, but extra income may be paid to the owners.
There are many other differences that are more complicated. If you are thinking of starting a business but don’t know whether it should be a for-profit or a nonprofit business, you should talk to a lawyer.