What Is A Non-Profit Organization

Non Profit organizations are business organizations that do not operate to make a profit.  However, most nonprofits businesses are organized into corporations.

Most corporations are formed under the corporations laws of a particular state. Every state has provisions for forming nonprofit corporations; some permit other forms, such as unincorporated associations, trusts, etc., which may operate as non-profit businesses on slightly (but sometimes importantly) different terms.

Tax-exempt nonprofit corporations can, and do, operate in all other particulars like any other sort of business. They have bank accounts; own productive assets of all kinds; receive income from sales and other forms of activity, including donations and grants if they are successful at finding that sort of support; make and hold passive investments; employ staff; enter into contracts of all sorts; etc.

Non-Profit Taxes

Non Profit organizations are exempt from certain taxes. 

Section 501 of the Internal Revenue Code lists several circumstances under which corporations are exempt from these taxes.

Section 501(c)(3) -- the famous one -- describes corporations (1) serving charitable, religious, scientific or educational purposes (2) no part of the income of which "inures to the benefit of" anyone.

There are some specialized tax rules and accounting practices that apply to nonprofit corporations.

If they are of a certain size, they are required to disclose many details of their operations to the general public and to state regulators and watchdog agencies using IRS form 990.

This form shows any salaries paid to officers or directors and to the five highest-paid employees and contracts if any receive over $50,000 in the tax year (at the time of this writing in 1998).

The form also requires the organization to divide its expenses into "functional categories" -- program, administration and fund-raising -- and report the totals for each along with the amounts expended on each program activity.

Resources

For more details on Tax Exempt Organizations consult the IRS Tax Exempt Organizations Manual (Publication 557)