Nonprofits: What You Need To Know In Under 6 Minutes

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Though you may not use the word nonparous to describe women who haven’t given birth, and nonpareil may not be your first choice of phrasing when expressing your appreciation for excellence, nonprofit is probably pretty familiar terminology.

But do you really know what a nonprofit is?

You do? Cool, see you for next week’s Jargon Hack.

However, if you’re curious about the difference between a charity, a private foundation, and a supporting organization, spend a few minutes with me exploring these nuances. It won’t take very long, and there are gifs!

Nonprofit? Non-profit? Not for profit? Not-for-profit? Is there a difference?

Turns out the hyphens are just personal preference. I opted for the non-hyphenated spelling mostly for my ease of typing, but if you prefer, hyphenate away!

Bonus points to readers who noticed, and chuckled at, the necessity of the hyphen in the word non-hyphenated. The English language, always reliable for its unreliability.

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The rest of our brief time together will be focused on nonprofit organizations (NPOs). If you are aching to explore the delicious details of the differences between nonprofits and not for profits, check this out.

Nonprofits are also known as non-business entities (hyphen required). This phraseology helps to imply that there are differences between businesses and nonprofits. One key difference is that nonprofits have no owners, and because of this, any funds raised cannot benefit these non-existent owners. Instead, nonprofits must serve the community, their members, or both!

An in-depth, and surprisingly-less-dry-than-you-would-expect-it-to-be, historical perspective on NPOs in the United States can be found here. If you declined to click, here are the basics:

  • Human charitability is as old as humanity itself.
  • Nonprofits, as we define them today, didn’t really exist prior to the 1970s. In fact, “over 90 percent of nonprofit organizations currently in existence were created since 1950.”
  • “Nonprofits and NGOs are the most rapidly growing types of organizations in the world.”*

According to Peter Frumkin’s book, On Being Nonprofit, there are over 1.6 million NPOs in the US alone.

A nonprofit can be described as an organization that is granted tax exempt status by the IRS. Lots of organizations qualify, and there are 34 different categories of nonprofit in the Internal Revenue Code; I encourage you to read through them all here sometime if you are suffering from insomnia.

Because nonprofits pay no income tax on donations or fundraising*, they must make all financial and operating info public. This is so donors know how their contributions are being used.

The most common form of nonprofit:

The 501(c)(3) aka Charities

501(c)(3) is the tax code covering charitable organizations. 501(c)(3)s must be deemed to generate public benefit.

This can be done by furthering: religious, charitable, educational, literary, public safety, and cruelty prevention causes, or even amateur sports.

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501(c)(3)s have to fulfill exemption requirements, including ensuring that, as is implied in the term ‘nonprofit’, the organization is not making a profit. This doesn’t mean that a charitable organization can’t generate any cash. Instead, it insures that any extra dollars accumulated must be retained and used for self-preservation, expansion, or plans. This also ensures that you can deduct any contributions from your taxes!

Foundations

While still sheltered under the charitable organization umbrella, a private foundation does not legally qualify as a public charity. This kind of nonprofit is usually created with a single donation. Often the initial donation is invested, then income from investments are disbursed each year to charitable activities. The funds and programs of private foundations are managed by their own trustees and directors. Trustees have a fiduciary responsibility to their foundations.

And if you’re particularly intrigued by the nitty-gritty of this nonprofit nerd-out, take note that there is a third option, which was created with the Tax Reform Act of 1969. Nixon did a lot with this one, but most important for our nonprofit education is the emergence of supporting organizations (SOs), which make grants to, or perform the operations of, a public charity. Check out US Code Title 26, Subtitle A, Chapter 1, Subchapter F, Part II, §509 for more info, or don’t. Basically, they get a higher deduction rate, like a charity, but get to function more like a private foundation.

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How do I know if they’re legit?

Let’s clear up a misconception. .org at the end of a domain name does not indicate anything with regards to nonprofit status. Anyone can have a .org. This domain was originally intended for nonprofit entities, but it’s not a distinction that is enforced. .org does not a do-gooder make.

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However! There are a few tools that can actually help you check the tax status and legitimacy of your chosen NPO, and you can find out more about them in this recommended reading.

Finally! Here’s a cool example of a nonprofit to check out with the election only a week away.

Vote Smart’s mission is to provide free, factual, unbiased information on candidates and elected officials to ALL Americans.

If you happen to plan a vacation to the famous Sweet Palace in Philipsburg, Montana, you might run into some of this nonprofit’s passionate employees and interns working toward increasing nonpartisan political literacy.

*Stash Invest does not endorse Vote Smart, or Montana, or candy stores in any way. Example included for illustrative purposes only.







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*Tax exemption does not apply to other federal taxes, such as employment taxes. And NPOs must pay federal income tax on income unrelated to their exempt purpose.