ABOUT US NONPROFITS

A Quick Overview of US Charitable Nonprofits for the Absolute Beginner

WHAT IS A NONPROFIT?

A US nonprofit is a special type of organization. Just like a commercial business, a nonprofit is a legal entity created in your state. Three things make a nonprofit special: (1) it’s purpose, (2) the fact that it has no owner, and (3) where its money comes from.

The Purpose

You may have guessed based on its name, that a nonprofit’s main job is NOT earning money.

Instead, “nonprofit entrepreneurs”create programs or organizations to further causes they believe in. The public and private sectors don’t address these causes well enough to suit them, and so these visionaries take action to create the changes they want to see.

The State

To launch a nonprofit, start by creating a corporation according to your state’s laws. Those laws define the kinds of activities that deserve nonprofit status—typically charitable, civic, educational, and religious.

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States use different names for their nonprofit organizations. For example, California has “Public Benefit Corporations” and Maryland, “Nonstock Corporations.” Nevada uses the term “Non-Profit Corporations, while Ohio uses the slight variation, “Nonprofit Corporations.”

The details are different, but the terms refer to the same kind of organization.

The Feds

The Internal Revenue Service (IRS) gets into the act by offering nonprofits exemption from federal income taxes. That means more paperwork and a hefty fee, but it pays off.

Grant makers and corporations typically make grants to nonprofits only if they have tax exempt (often called 501c3) status. And people who make charitable contributions often use 501c3 status as assurance that a nonprofit is legitimate and that their contributions to it are tax-deductible.

Finally, some states offer their tax-exempt nonprofits exemption from some state taxes. This helps these nonprofits use more of their funds to carry out their work.

What, No Owner?

Another fact that makes a nonprofit different from a business is that by law, no one can own a nonprofit. A board of directors or trustees has legal responsibility for the nonprofit and oversees its affairs the way an entrepreneur does her business.

And while a business owner can generate as much profit as possible for herself and her investors, nonprofit directors can’t legally receive what IRS calls, “excess benefit,” from their board service.

Some states—California, for example–allow “reasonable compensation” for nonprofit board members. Others allow no compensation, only reimbursement of expenses.

Where’s The Money?

The last thing that makes a nonprofit different is where its money comes from.

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Generally speaking, a business earns money by providing products or services at prices high enough to create a profit for the owners and investors. Not so with nonprofits.

Two Types of Nonprofit

In the U.S. we have two kinds of nonprofit: foundations and public charities.

A foundation gets its money from an individual or a family, while a public charity gets money from multiple public sources—including government, corporations, private individuals and foundations.

Foundations and public charities don’t have owners. Instead, a board of directors or trustee assumes responsibility for the organization. These nonprofits also must limit their grant making and programming  to charitable, civic, educational, and religious activities.

Public charities typically run programs or engage in public advocacy. Some foundations act only as grant makers, some only run programs, and some do both.

These two types of nonprofit follow different federal rules and receive different tax treatment. So, as a prospective “nonprofit entrepreneur,” you’ll need to decide which kind of nonprofit you want to launch.

THAT’S IT

Now you know what a U.S. nonprofit is: a purpose-driven, rather than profit-driven corporation that makes grants, runs programs, or both to serve “the greater good.”

If you’re thinking of launching a nonprofit, use the free resources here to help you decide if that’s the right move. Just use the links in the sections below for more information.

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