What Does It Mean To Be A Nonprofit

Most people assume that the word nonprofit means that the organization cannot make a profit.

Nonprofit defined

A nonprofit organization is one that has been organized and is operating under the code sections in the Internal Revenue Service allowing them to be exempt from taxes. Therefore, the term nonprofit and tax exempt are used synonymously.

501(c) what?

You may have also heard a series of letters and numbers used.  This refers to the IRS code section that describes that specific type of nonprofit.  For example, 501(c)(3) is for charitable nonprofits and those organized for church or religious purposes.  A few other common types are 501(c)(4)’s (civic leagues or welfare organizations) and 509(a)’s (Foundations that support other tax-exempt organizations). 

No benefit = No Profit

In a for profit business, it is common to distribute profits as bonuses to staff, compensation to the board, etc.  To get the benefits of tax exemption, the IRS requires that in a nonprofit “no part of the organization's net earnings can inure to the benefit of any private shareholder or individual.” Or said another way – the profit in a nonprofit entity must be used for the nonprofit’s tax-exempt purpose, not for the benefit of its staff/board. 

PROFIT is good!

It is ok for the nonprofit to make a profit! It must be used to serve the organization's purpose!  It can even be a good thing to make a profit in years that you are saving towards a larger expense, such as launching a new program or a building project!  But accumulating profits (net assets) without a purpose is not good stewardship either.

I hope this clarity gives you confidence and direction in the nonprofits you lead, support or benefit from.  If you gained insight from this article, do me a favor and share it with those you know could benefit too!