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People hear the term nonprofit and picture Mother Hubbard’s cupboard, as in awfully bare with a zero bank balance. But in fact, some nonprofit organizations turn profits on their operations, and that’s good, because surplus cash keeps an enterprise humming, whether it’s a for-profit business or not.

Comparing for-profits to nonprofits

The main difference between a for-profit and a nonprofit enterprise is what happens to the profit. In a for-profit company like Walmart, General Motors, FedEx, or your favorite fast-food chain, profits are distributed to the owners (or shareholders). But a nonprofit can’t do that. Any profit remaining after the bills are paid has to be plowed back into the organization’s service programs, spent to strengthen the nonprofit’s infrastructure, or kept in reserve for a rainy day. Profit can’t be distributed to individuals, such as the organization’s board of directors.

What about shareholders – do nonprofits have any shareholders to pay off? Not in terms of a monetary payoff, like a stock dividend. But in a broad, service (not legal) sense, nonprofits do have “shareholders.” They’re the people who benefit from the nonprofit’s activities, like the people who tune in to public radio or enroll their children in a nonprofit preschool. These people are often called stakeholders because they are committed to the success of the nonprofit.

Introducing the one and only 501(c)(3)

When we use the term nonprofit organization in this book, for the most part, we’re talking about an organization that has been incorporated (or organized formally) under the laws of its state and that the Internal Revenue Service (IRS) has classified as a 501(c)(3) and determined to be a public charity. If the term 501(c)(3) is new to you, add it to your vocabulary with pride. In no time, “five-oh-one-see-three” will roll off your tongue as if you’re a nonprofit expert.

Private foundations also have the 501(c)(3) classification, but they aren’t public charities. They operate under different regulations, and we don’t cover them in this book.

Other kinds of nonprofit organizations do exist; they’re formed to benefit their members, to influence legislation, or to fulfill other purposes. They receive exemption from federal income taxes and sometimes relief from property taxes at the local level. (Chapter 2 discusses these organizations in greater detail.)

Nonprofit organizations classified as 501(c)(3) receive extra privileges under the law. They are, with minor exceptions, the only group of tax-exempt organizations that can receive contributions that are tax deductible for their donors.

The Internal Revenue Code describes the allowable purposes of 501(c)(3) nonprofit organizations, which include serving religious, educational, charitable, scientific, and literary ends.

Check out File 1-2 at www.dummies.com/go/nonprofitkitfd5e for a more detailed list of the activities that 501(c)(3) nonprofits take on.

Being a nonprofit organization doesn’t mean that an entity is exempt from paying all taxes. Nonprofit organizations pay employment taxes just like for-profit businesses do. In some states, but not all, nonprofits are exempt from paying sales tax and property tax, so be sure that you’re familiar with your local laws. Also, check with the appropriate office in your state to learn if you’re required to apply for a state tax exemption.

A SECTOR BY ANY OTHER NAME

Not everyone thinks that nonprofit sector is the best name. That’s because of the array of organizations with different types of nonprofit status. Some of these organizations are formed to benefit their members – such as fraternities and labor unions – and don’t share a broad public-serving intent. Another reason nonprofit sector may not be the best choice of terms is its negative connotation. After all, what’s worse than not making a profit? But, as we point out earlier, and we remind you again in later chapters, not making a profit isn’t the determining factor. Alternative terms that you may hear include the following:

• Voluntary sector: This term emphasizes the presence of volunteer board members and the significance of voluntary contributions and services to the work of 501(c)(3) organizations. In this definition, the organizations alone don’t represent the meaning of nonprofit; the definition includes the vast web of supporters who participate as volunteers and donors.

• Independent sector: This term emphasizes the public-serving mission of these organizations and their volunteers and their independence from government. (Independent Sector is also the name of a nonprofit organization that provides research, advocacy, and public programs for and about the nonprofit sector.)

• Charitable sector: This term emphasizes the charitable donations these organizations receive from individuals and institutions.

• Third sector: This term emphasizes the sector’s important role alongside government and the for-profit business economy.

We use the term nonprofit sector throughout this book, but we want you to understand its limitations and be familiar with other commonly used terms.