A non-profit organization (NPO) is defined as an organization that does not distribute surplus income to shareholders but rather uses its funds to pursue a specific public purpose. Also called “not-for-profit organizations,” NPO’s can file for certain tax-exempt statuses so long as they meet government requirements.
Features of non-profit organizations
The main focus of any non-profit organization or corporation is not to collect profits but rather to fulfill their stated goal. Instead of distributing profits to members, any additional income that the organization makes (called “surplus”) is recycled back into the organization for furtherance of their goals. This financial scheme serves to ensure that there are companies who exist to promote efforts aimed at benefiting humanity as a whole.
Usually the non-profit’s goal is stated in the organization’s mission statement. It is important for the mission statement to clearly and precisely define the organization’s purpose, since their non-profit status hinges on their purpose.
Tax Exempt Status
In order to obtain tax-exempt status, the organization’s purpose must fit in one of the following categories of public purpose:
It is important to note that the purpose must be tangible and provable. This holds true even for the religious and scientific categories; many organizations do not qualify as non-profit organizations because their purpose is unfeasible. For example, an organization claiming to be pursuing the “scientific purpose of studying flying cats” might not qualify; whereas, a literature society that exists to discuss flying cats in popular literature might qualify under the literary category.
Tax exemption means that the organization does not have to pay federal or state taxes on activities that are related to the organization’s purpose. This means that the organization must demonstrate that it is actively working toward its goal through proper documentation. Again, this serves as an incentive for more organizations to make contributions towards development and humanitarian efforts. The non-profit organization still has to pay taxes on activities that are unrelated to their stated purpose, for example, the sale of unrelated products or services.
Filing for Non-Profit status
The vast majority of non-profits being filed today do so as a “Charitable Organization” under section 501(c)(3) of the Internal Revenue Code put forth by the Internal Revenue Service. This is done by filling out IRS Form 1023. There is an $850 filing fee if the organization makes over $10,000, and a $400 fee if it makes less than $10,000.
Some organizations such as churches automatically qualify as non-profits, even without filing. Also, fees have been subject to change, so double check with the IRS to verify filing fee amounts.
Charitable Organizations are different from “public charities” and “private foundations”. The IRS defines a public charity as a charity that derives the majority of its income from the public or from governmental support. A private foundation is defined as an organization that receives its funding from private sources such as investments. Additionally, private foundations do not make disperse their funds directly in charity but rather …