Not For Profit (NFP) organizations are different from the For Profit (FP) organizations in several key ways.
First, a major source of funding for a NFP comes in the form of grants from foundations and through government at various levels. A grant is a special type of funding vehicle and has a number of unique requirements. Below is a general outline that we have prepared for our clients.
Second, the NFP is a special class of corporate structure from the routine business organization. It is a publicly held corporation created by the state for purposes the state demeans of value to the public and from which the public will benefit. In return for performing its services and functions, the not for profit is permitted to raise revenues for those specific purposes on a tax free basis. The board of directors are not the owners of the corporate assets, rather they are the trustees of the assets. The assets of the NFP belong to the public and can only be passed from one NFP to another.
Third, the NFP established at the state level is recognized by the United States government's Internal Revenue Service as a tax free organization under Sec. 501 (c)1 thru 27. Tax exemption may vary from complete exemption from taxes to partial exemption depending on the NFP's designation.
Fourth, the NFP is Mission driven rather than profit driven. This means the NFP's strategic goal is to achieve or promote a public good rather than to simply generate a financial profit for its owners. Here is where there is often confusion among those who work in the NFP sector. A NFP can and must be able to generate a surplus of revenue, that is earning exceeding expenses, if it is to survive. That surplus, in the For Profit organization, would be considered retained earning to be reinvested in the organization, and profit to be distributed to the owners. In the NFP there are retained earning just no profit category for the surplus.
Fifth, the unique nature, especially tax status, enables the NFP to pass on its tax benefits to those who donate money to it. The IRS allows the public to deduct from their income taxable income they donations that they make to recognized 501 (c) Not for Profit organizations. This creates a whole economy where funds can be donated to a public charity which in turn can donate its surplus to other NFP to actually carry of their mission.
So, if you are a NFP, or a planning to create one remember that the reason you exist is your Mission and you need to match your funding to your Mission and not the other way around. If you have any questions contact us directly or post a comment here.
