Characteristics NonProfits Share:A nonprofit organizatin is an organization with a purpose, known as a mission, is an overriding goal other then making a profit. For example, a nonprofit may promote cancer care funding, improve access to goods or services for low income individuals or the arts such as music or ballet. All nonprofits have at the core a social mission as a reason for their existence.
For profit entities (such as corporations and other businesses ultimately answer to shareholders, owners, and partners. Unlike their for profit counterparts, nonprofits do not exist to generate revenue for owners or shareholders. Nonprofits do not even have owners and shareholders. Rather, all nonprofits have stakeholders.
Stakeholders:A stakeholder, as the term inplies, is an individual or group with an interest in having the nonprofit fulfill it's mission.
Stakeholders include anynone who's interested or affected by the nonprofit organization and it's services.
Stakeholders in the nonprofit sector include the following:
Users: By users, we mean the people and parties who actually use the services and goods created, distributed, or allocated by the nonprofit organization.
Community: Oftern the surrounding community as a whole will have a stake in how well a nonprofit organization meets it's mission and objectives.
Donors and Funding Sources: This group includes the people and entities (including the government) that help fund the operations of the non-profit.
Documentation:Each nonprofit has it's own DNA-like uniqueness. However, three particular types of documentation link most nonprofits;
Mission Statements, Charters and ByLaws:
Mission StatementA mission statement isn't a legal document, but it's the document that defines a nonprofit organization's goals and reasons for existing. All nonprofits should have a clear mission statemet that's reviewed periodically to make sure that it reflects the organizations current objectives. The mission statement helps the nonprofit stay on track, and informs the public of what that organizations objectives are.
Nonprofits generally fulfill their missions by creating and managing an organizational structure that's staffed and organized to meed their day-to-day goals.
KEY NOTE: When an organization has outlived it's mission (in other words - if the issues for which it was formed no longer exists) the nonprofit itself may be rightfully questioned by it's stakeholders.
ChartersA Charter is the prerequisite for official status as a nonprofit corporation within state. In other words, it's the constitution of the organization.
This document, which is sometimes called a certificate of incorporation is typically filed with the secretary of state. Changes to the charter requiere a formal amendment and most states require organizations to file annual reportsto keep their nonprofit status.
ByLawsFor nonprofit corporations, bylaws outline the basic operating rules for your organization and spell out how it's governed. Bylaws include rules pertaining to directors, officers, meetings, and voting.
Funding and Financing:Most nonprofits don't generally conduct their operations to generate income. In fact nonprofits are not allowed to compete wih the private sector businesses. Instead, nonprofits typically depend on the following sources to finance activities consistent with their missions:
DonationsPrivate citizens can sometimes get tax deductions when they donate money to nonprofits.
Fundraising activitiesNonprofits may carry out certain income generating activities such as food drives, charity balls, special sales and activities but may have to pay taxes on the earnings if they compete in certain ways with private busineses.
Nonprofit FoundationsIndividuals and organizations may establish private foundations These are tax exempt entities generally run by private individuals to accomplish tax-exempt purposes.
The GovernmentNonprofit organizations are often established to carry out state, federal and local government programs. These organizations may receive tax revenues that are allocated for such programs. Tax-exempt statusNonprofits generally don't have to pay federal income taxes on the funds that they receive from sources listed n the preceeding section. This is referred to as tax exempt status. The requirements for obtaining tax exempt status will be discussed in more detailed in other sections. But for a general perspective to receive tax exempt status an organization must be operated exclusively for one or more of the following purposes;
Charitable
Religious
Educational
Scientific
Literary
Public Safety
The fostering of national or international amateur sports competitions
The prevention of cruelty to children and animals.
LimitationsBecause of the priviledged tax-exempt status, nonprofits are prohibited from doing certain things that are completely acceptable for the private for profit sector such as:
A) Engage in prohibited political activities - nonprofits are prohibited from political campaign activity.
B) Change their operations on a whim - nonprofits must adhere to the purposes for which they were established. So, unlike their corporate counterparts, they can't diversify and evolve freely to reflect changing markets of community needs.
C) Farm out control of their operations - nonprofits must be governed by their own boards,and can't have outside management teams.
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These are the basic requirements. Organizing a charitable organization should include a number of operational duties for the survival of the business. At a minimum, these items should include a strategic plan, case statement, articles of incorporation, budget, and set of bylaws.
1) Determine whether you really need to start a charitable enterprise. Would you be better off to filing as a small business or for-profit corporation? Keep in mind that there are many rules and regulations that govern the operation of a nonprofit corporation, depending upon the state in which the business is located. This may include a yearly audit or tax forms to special reporting agencies. Another thing to consider is that there is usually more administrative paperwork necessary to operate a charitable organization than a for-profit business (sole proprietorship). You will be asked to define your charitable purpose and will have regulations that will govern the amount of compensation to your board of directors and/or officers.
2) Check with your state business office to determine their requirements
3) Check with the IRS office to file the necessary forms. Determine what type of entity classification you will use. Not all will have tax-exempt status. The most common form is the 501(c)3, tax exempt organization, organized for charitable purposes.
Questions?Consult an attorney after reading the requirements of each option. IRS publication #557, Tax Exempt Status for Your Organization is very helpful. It explains the application procedures and forms required.
To obtain IRS Forms and Publications at the IRS Web Site: http://www.irs.gov/charities/index.html
4) Depending on organizing requirements, you may need to develop a set of bylaws to guide the operations of your organization, and a set of articles of incorporation. The bylaws are extremely important. They should provide instructions as to the selection, responsibilities, and continuance of board members, membership requirements, officers, deposits, committee structures, notices, and other personal and insurance questions as they relate to the operations of the specific nonprofit business.
The Articles of Incorporation name the entity, its location, the organizing purposes, liability, and include the dissolution requirements of the corporation.
Government publications that are available
To view Publication 557 -Tax Exempt Status of Your Organization Online
To download Publication 557 -Tax Exempt Status of Your Organization PDF
Use Adobe Acrobat to read this lengthy document. It describes the different types of entities and provides information about requirements. If you do not have Adobe Acrobat Reader, you may download it at the Adobe website.
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How to Start a Tax Exempt Organization 501(c) 3
1) Application for Recognition of Exemption.
2) Application for Employer Identification Number,
Tax-Exempt Status Final Key Points
