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NPO (Non-Profit Organization)

An entity that is driven by a dedication to a social cause in the areas of religion, science, research, or educational settings

What is an NPO (Non-Profit Organization)?

An NPO (non-profit organization) is an entity that is driven by a dedication to a social cause in the areas of religion, science, research, or educational settings or advocating for a specific shared view. Unlike corporations, all revenues earned by a non-profit organization are used in furthering its target objects instead of being distributed to shareholders, members, or employees of the organization.

 

NPO

 

Non-profits in most jurisdictions, such as the United States, Canada, and the United Kingdom, are tax-exempt, meaning that they do not pay income tax on the income that they receive. The revenues earned by a non-profit organization are mainly from donations from individuals and corporate organizations, as well as from fundraising activities.

The donations are tax-deductible for the individuals or corporations that contribute, and the organization is not required to pay taxes on the monies. NPOs are accountable to the donors, volunteers, founders, and the community, and the projects they undertake help build public confidence in the organization.

 

Summary

  • An NPO (non-profit organization) is an organization that focuses on a social cause, such as science, religion, research, or education.
  • NPOs qualify for tax-exempt status in the United States, and they are not required to pay tax on the revenues they receive from donations.
  • Examples of non-profit organizations include hospitals, foundations, universities, churches, mosques, and national charities.

 

Requirements for NPO Status

Non-profit organizations in the United States are monitored by the Internal Revenue Service (IRS) using Code Section 501(c). The code determines an organization’s eligibility for the non-profit organization status. The following are some of the requirements that non-profits are required to meet:

 

1. Serve the public

One of the requirements for a non-profit organization is that it must serve the public. The IRS requires that the organization must be structured and operated solely for exempt purposes such as science, religion, charitable, literary, research, public safety testing, children’s safety, and animal cruelty prevention.

Examples of non-profit organizations that operate around such settings include universities, churches, national charities, and hospitals. The organizations must also share their financial and operating information with the public so that the founders, volunteers, and donors are aware of how their contributions are being used.

 

2. Tax exemption

Non-profit organizations qualify for tax-exempt status from the IRS, and this helps keep more revenues within the organization to help in undertaking their ultimate objectives. However, for an organization to be tax-exempt, it needs to request the 501(c) (3) status from the IRS, and meet the requirements set out in the Internal Revenue Code.

The federal government is responsible for granting tax-exempt designation through the IRS, whereas the non-profit status is granted by the state in which the organization operates. Once the non-profit is granted the tax-exempt status, it is required to continually meet the compliance requirements with the relevant state agency.

 

3. Non-political

Non-profit organizations are barred from participating in political activities or incurring expenditures for political activities. They are required to maintain a non-partisan approach, and they must not engage in political campaigns. When requesting 501(c)(3) status, non-profits are required to state explicitly that they will not participate in political activities or incur expenditures for political status.

If a non-profit organization engages in political activities, it risks losing the tax-exempt status from the IRS. However, some non-profits are formed to further political activities, and they are granted the 501(c) status rather than 501(c)(3) status.

 

How Non-Profit Organizations Raise Money

Although non-profit organizations are not driven by a profit motive, they must collect revenues that help them further a specific social cause. The main sources of income for non-profit organizations are donations from individuals, corporations, and foundations. Non-profits may also receive sponsorship for specific projects being undertaken from corporations, government funding, merchandise sales, and even private investments.

Due to the important role that non-profit organizations play in shaping the community, they’ve been forced to adopt new methods of raising revenue to be financially stable. Over-reliance on donations and sponsorships may create cash flow problems for the organizations when the donors fail to make contributions or the amounts donated fall below the funding requirements of the organization.

To bridge the gap, non-profit organizations are diversifying their funding sources to include fundraising activities, merchandise sales, and even private investments. The revenues collected go towards providing goods or services to beneficiaries, financing community projects, paying staff salaries, and meeting office expenses, such as utility expenses, rent, and stationery.

However, non-profits must carefully manage the expenses incurred, such as staff salaries and the expenses incurred in pursuing the target objects. Organizations that incur high expenses in the form of staff salaries relative to the program expenses may attract regulatory scrutiny.

 

Non-Profit vs. Not-for-Profit Organization

The terms “non-profit” and “not-for-profit” are often used interchangeably to refer to organizations that do not distribute their profits to shareholders. However, both terms refer to different types of organizations that differ in their scope, size, and the activities that they undertake.

Non-profit organizations are large, more organized organizations that focus on a specific social cause, such as religion, education, environmental, research, or a science setting. On the contrary, not-for-profit organizations tend to be smaller in size, and they focus on sports, hobbies, or special interests of members.

Another difference between non-profits and not-for-profit organizations is that the former can form a separate legal entity and qualify for tax-exempt status from the US Internal Revenue Service (IRS). On the other hand, not-for-profits cannot take on a separate legal entity of their own. Also, not-for-profit organizations do not qualify for tax-exempt status in the US.

 

Related Readings

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

  • Corporate Social Responsibility (CSR)
  • Financial Modeling for Non-Profits
  • Not-for-Profit Organizations
  • Free Rider

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