By: Johileny Merán
When a person or a group wants to start an organization, they must first understand what types of organizations are out there: for profit, non-profit 501(c)3 and tax exempt, non-government (NGO), and government organization (only a government can create). Once they determine what type of organization they want to create, the first step in the creation process of both for-profit and nonprofit organizations is to file to be a business entity in the state in which it intends to operate. There are different business types; most non-profits are corporations. A corporation is a business entity that is granted certain rights and is considered a “person” under the law.
A for-profit organization is a company that seeks to make money. It does so generally by selling a product or providing a service. The aim is to maximize profits, which means to maximize revenue and minimize cost. These profits are distributed to the company’s shareholders and owners. As a result, for-profit organizations are responsible for paying taxes on their net income.
A non-profit organization (NPO) is one whose mission aims to further a particular social cause or to advocate for a specific need. As a business entity, nonprofits may seek to make money, but the money is not for profit, it is intended to fulfill the mission of the non-profit organization by growing its programs to benefit the community.
Unlike for-profit organizations, the income generated is not distributed to owners or shareholders. Instead, it’s recycled and dedicated toward the benefit of the public and advancing the purpose for which the non-profit was organized.
Although a non-profit might sell or provide a service, the profits produced are transferred to support defined community efforts, such as in the case of the Girl Scouts selling cookies.
Generally, it operates through fundraising efforts with sponsors, events, donations, and grants. It’s a board of directors consists of voluntary members that may bring in resources to help with fundraising efforts and expanding the organization’s community outreach. This voluntary aspect is distinct to non-profits organizations.
Considering that the goals of non-profits are to make the world a better place by investing time, funds, and resources into the community, some non-profits are granted tax-exempt status after applying for a 501(c)3 designation. Later on, we will learn what a 501(c)3 is and what it means to be tax exempt.
A Government agency is established to fulfill specific functions for the administration or oversight of government. The state or federal treasury provides and collects funds. Senior government officials are responsible for making decisions to shut down, expand, or maintain it.
Non- Governmental Organizations
Non-Governmental Organizations (NGOs) are considered a category of a non-profit, independent from government-operated programs, insight, or administration. Most work in low-income countries but may also serve low-income communities of their own country, particularly after a natural disaster. An executive board of directors and staff devises a funding strategy directly related to the mission it seeks to accomplish. Funding comes from donations, government grants or contracts, and corporate sponsorships used to support the organization’s programs and services.
Many implement best practices, such as working closely with grassroots organizations and residents in the areas in which they work, serving the priorities of the communities they support. Additionally, they are accountable to those they serve and often collaborate with local nonprofits and NGOs. Financial annual data is reported to their national governments.
Both a non-profit organization and a non-governmental organization work towards improving human welfare and bettering society. But NGOs designation refers to an organization that operates in countries other than the U.S. to support national and international programs for causes such as human rights, disaster relief, and international development.
What is a 501(c)3?
A 501(c)3 is a non-profit organization that is designated tax-exempt status under Section 501(c)3 of the Internal Revenue Code. These organizations are held under certain guidelines and restrictions. To be considered under this designation, organizations must operate for exempt purposes such as charitable, religious, educational, scientific, or other. Its earnings must not go to any private shareholder or individual. And it cannot be an action organization described as one whose activities are substantially political or legislative action (commonly known as lobbying). A 501(c)3 organization is allowed to engage in some lobbying but not too much.
How do to become a 501(c)3?
To become a 501(c)3, an organization must file Form 1023 with the federal government’s Internal Revenue Service (IRS). Before applying, an organization must do four things: (1) determine that the organization is a trust, corporation, or association (most nonprofits are corporations); (2) gather organization documents such as the articles of incorporation for corporations; (3) determine the state’s registration status requirement; and (4) obtain an Employer ID Number (EIN). It is the official number that a business entity needs in order to open bank accounts, apply for loans, and file taxes. Once obtained, it is used to apply for “tax-exempt status” with the IRS using form 1023 to seek exempt status.
When an organization receives a tax-exempt status under section 501(c)3, nonprofits must adhere to public disclosure requirements. The disclosure includes making financial documents of the previous three years publicly available upon request by any public individual. They also provide its donors with a statement that includes activities, all revenues, plus net tax and expenses. And typically, it will also produce a statement of financial position which shows assets and organizations liabilities.
What is the difference between a nonprofit and a federally recognized as tax-exempt organization?
Non-profit refers to a corporation status under state law. While being federally recognized as tax-exempt refers to organizations given federal income tax exemption under the internal revenue code. Many organizations are both nonprofits and tax exempt. However, to have tax-exempt status means that an organization is exempt from paying federal corporate income tax on income generated from activities related to the purposes of the organized entity. Tax exempt organizations must still pay federal corporate income tax on income which is not related to its tax-exempt purposes and a wide variety of other taxes such as payroll tax, among others.
How to Form a Nonprofit Corporation
National Council of Nonprofits
The Revolution Will Not Be Funded
ABOUT THE EXPERT
How did we do? Take the survey.