What Is a Nonprofit Organization?

Updated July 21, 2022

Nonprofit organizations fill an important social need to provide aid to people who need it. They offer various services without requiring payment from recipients. If you are interested in a career in charitable work, you might consider working for a nonprofit or starting one. In this article, we explain what nonprofits are, how they operate, types of nonprofits and how to start one.

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What is a nonprofit?

A nonprofit is an organization that by law does not pay tax to the government because its activities support the citizens of a country. A nonprofit provides free services to the citizens of a country. Some common nonprofit services include feeding, sheltering, medical aid, legal aid, advocacy and education. Nonprofits also mobilize communities and help to bring people together for a common cause.

How do nonprofits operate?

Nonprofit organizations operate by receiving donations from individuals, organizations and government. All the funds received are channeled towards the cause of the organization. They do not declare a profit, and they do not distribute profit at the end of the business year. Nonprofits can hire personnel and pay salaries, but they must channel the rest of their funds to providing services.

Related: How To Change Careers

Types of nonprofits

There are many different causes and types of nonprofit organization, most of which classify as one of the following types:

  • Religious organizations: Religious and faith-based organizations such as churches, mosques, synagogues and temples are all considered nonprofits because they help people in their faith. They seek converts, hold meetings and support people. Most religious organizations help people by offering clothing, shelter, support and counseling for people in need.

  • Arts and culture: Most organizations that offer services in arts and culture are nonprofits. The government often supports such organizations because they help to educate the people. Arts and cultural groups provide entertainment and help people connect. Most museums and theater groups are set up as nonprofits and get their funds through charitable donations, gift shops and government support. Cultural centers help to preserve history and educate people.

  • Chambers of commerce: Chambers of commerce help to oversee commercial activities and businesses in society. They advocate for business concerns and work to promote good business practices and improve the relationships of business communities.

  • Labor unions: Labor unions are nonprofits because they serve as an avenue for advocating for the common interests of workers.

  • Disaster relief organizations: Disaster relief organizations provide aid to victims of disasters, such as hurricanes, tsunamis, earthquakes, wars and famine.

  • Medical organizations: Some medical organizations can also be registered as nonprofits. They go to different countries where there are emergency needs for doctors, nurses and other medical personnel.

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How to start a nonprofit organization

Starting a nonprofit organization is similar to starting a new for-profit business. Nonprofits must serve a recognized purpose before the government can grant them tax-exempt status. Use these steps to start a nonprofit organization:

  1. Decide the purpose.

  2. Write a business plan.

  3. Register as a nonprofit.

  4. Form a board of directors.

  5. File for nonexempt status.

  6. Comply with legal requirements.

1. Decide the purpose

The first thing to understand about starting a nonprofit organization is that it must serve a purpose. Determine the unserved or underserved niche your organization will serve.

Just like in for-profit business ventures, if you discover your niche, you can then understand how to craft a message that draws in donors to your organization.

Related: Business Development Skills: Definition and Examples

2. Write a business plan

Even though a nonprofit is not considered a business, it still requires a business plan that states what services it will offer, how you will source for funds and what the funds will be used for. A marketable business plan will help you solicit funds from organizations that want to support charitable causes.

Related: Ultimate Guide To Strategic Planning

3. Register as a nonprofit

A venture is not considered a legal entity until it has a document that designates it as one. To register your nonprofit, go to the National Association of State Charity Officials (NASCO) website and look up your state to file. You must decide what legal structure your nonprofit will be such as a trust, a corporation or an association.

Registering your organization as a legal entity has the following benefits:

  • Confers on you the opportunity to file for tax-exempt status

  • Allows you to solicit funds

  • Gives credibility to your activities

  • Limits the liabilities of your organization's directors and owners

4. Form a board of directors

A nonprofit is mandated to have a governing board that helps to direct the affairs of the entity. This means that even though you are the owner of the nonprofit, you do not have an exclusive right to make decisions about the entity.

As the owner, you have the opportunity to choose the board members. It is required that a nonprofit organization has a board to prevent abuse of trust. This governance structure helps to provide checks and balances for the organization.

5. File for nonexempt status

Registering your organization as a nonprofit does not automatically confer tax-exempt status. You need to file form 501(3)(C) to the IRS to indicate that you want to be a tax-exempt organization. The IRS will make a decision and respond to you before you are allowed to operate as a tax-exempt organization. Wait times can be between three to twelve months.

6. Comply with legal requirements

To continue as a valid nonprofit entity, make sure to maintain compliance with all legal standards or requirements for nonprofits. Some requirements include keeping accurate records and filing a 990 form annually. This form helps to keep your entity in tax-exempt status.

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