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Pros and Cons of Nonprofit Organizations

Gifts to certain nonprofits are considered tax-deductible.

Nonprofit or not-for-profit organizations exist to assist other individuals, groups or causes instead of making money for themselves. These organizations make up a growing, integral part of the economy, along with businesses and government entities. The National Center for Charitable Statistics (NCCS) keeps an updated table wizard with current statistics. In fact, as of 2010, Foundation Center reports, "According to the NCCS Table Wizard, there are currently over 1.5 million nonprofit organizations in the United States."

Incorporations and Operations

Nonprofits are subject to all the regulations of a for-profit corporation along with additional regulations. The incorporation and application process is longer and requires more fees and other costs, though these are usually still affordable. In order to maintain nonprofit status, you must keep detailed annual records and limit your actions to those allowed by federal law. For example, nonprofits are severely limited in the amount of lobbying or legislative advocacy they may engage in.

Taxation

Tax-exempt status is the primary benefit for filing as a nonprofit. Since the nonprofit does not have to pay income taxes, you increase your ability to create income and increase assets, which allows you to be more productive and efficient. Secondly, if you hold tax-exempt status, all charitable contributions are tax deductible. Offering potential donors this benefit provides additional incentive to give to your organization. You must apply to the Internal Revenue Service (IRS) for tax-exempt status and maintain federally compliant operations in order to keep it. Keep in mind that the rules for a nonprofit are state laws and those for tax exemption are federal.

Liability and Other Laws

Some states offer nonprofits immunity from tort liability, or, injury due to negligence. That immunity, however, affects only the corporation and not the related employee or entity who caused the injury. Unlike for-profits, nonprofits avoid dealing with unions. Reference for Business reports, "Nonprofit organizations enjoy exemption from the various rules and guidelines of union collective bargaining, even if their work force is represented by a union."

Financial Advantages

Nonprofits often depend on gifts for income, so having permission to solicit funds is a major advantage. Some states offer this benefit immediately upon incorporation, but others require you to file additional applications and fees. You also qualify for certain government funding and grants, though these require applications as well. Some enjoy low postage rates and discounts or free advertising for public service announcements.

Financial Disadvantages

In contrast, a major disadvantage is how you must handle your money. The complex rules and regulations mean you must have an attorney and an accountant to make sure you're compliant. The many fees for incorporation and tax-exempt status, as well as the increased cost for annual reporting, can really make a dent in your income. The use of that income is regulated as well. FindLaw says the organization "can only pay managers reasonable salaries" and "can't divide profits equally" or "pay board of directors." Additionally, upon dissolution it "must distribute assets to other non-profits," states FindLaw.


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Article Written By Dana Griffin

Dana Griffin has written for a number of guides, trade and travel periodicals since 1999. She has also been published in "The Branson Insider" newspaper. Griffin is a CPR/first-aid instructor trainer for the American Red Cross, owns a business and continues to write for publications. She received a Bachelor of Arts in English composition from Vanguard University.