What Is a Nonprofit?

The term "nonprofit" covers a broad range of entities including churches, colleges, universities, veterans groups, and country clubs. Sources of revenue, ownership structure, and activities distinguish nonprofits from "for-profits." Nonprofit organizations must serve public, not private, interests.

In order for an organization to be classified as a nonprofit entity, it must be engaged primarily in qualified charitable or educational endeavors. The essence of a nonprofit is to carry on an activity because it is important, and not as a means of generating profits for investors (as a for-profit would). This does not mean that an organization cannot hire people and pay them for their work, or that it must operate at a loss. Any surplus gained should generate more "good works."

There are different types of nonprofit organizations with different rights, privileges and obligations under the Internal Revenue Code. A few major distinctions are outlined below:

501(c)(3) Organizations

Organizations classified as 501(c)(3) organizations under the Code must prove that they operate exclusively for religious, educational, scientific, or similar purposes. Churches are included in this category. A 501(c)(3) does not have to pay income taxes and is authorized to issue tax-deductible receipts to donors for contributions. Having tax-deductible status significantly helps in attracting grants and contributions from foundations and individuals that are critical to a charitable organization.

Other Nonprofits

Other nonprofits, however, while they do not have to pay income taxes, are not able to issue tax-deductible receipts to donors. Or, in other words, donors to these organizations cannot take deductions on their income taxes.



This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.