# Nonprofit Organization (NPO): Definition, Funding, vs. Not-for-Profit

![Nonprofit Organization (NPO): An entity that exists to further a social cause and provide a public benefit.](https://www.investopedia.com/thmb/dSABqgbEzFXdPU-e-PpuDvIB3pg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Non-profitorganization_final-318d87a364914361afa52c3aab3f92dc.png)

*— Investopedia / Michela Buttignol*

## What Is a Nonprofit Organization (NPO)?

A nonprofit organization is an entity that is created and operated for charitable or socially beneficial purposes rather than to make a profit. A nonprofit might serve religious, scientific, charitable, educational, literary, health, or animal welfare purposes.

In the U.S., many nonprofit organizations are granted [tax-exempt](https://www.investopedia.com/terms/t/tax_exempt.asp) status by the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp). Donations made to a nonprofit organization are typically tax-[deductible](https://www.investopedia.com/terms/d/deductible.asp) and the nonprofit itself pays no tax on donations or on money earned through other fundraising activities.

Nonprofit organizations are sometimes called NPOs or [501(c)(3) organizations](https://www.investopedia.com/terms/1/501c3-organizations.asp) based on the section of the Internal Revenue Service (IRS) tax code that permits them to operate.

### Key Takeaways

*   The mission of a nonprofit is to contribute a benefit to society rather than to make a profit.
*   Nonprofits may receive donations from individuals, corporations, and government entities.
*   To qualify as a tax-exempt nonprofit, the entity must serve the public good, meet filing requirements, be established as a 501(c)(3) or similar type of organization, and avoid engaging in certain types of activities.
*   Nonprofits file Form 990 with the IRS to report their revenues, expenses, and activities.

## Understanding Nonprofit Organizations (NPOs)

A nonprofit designation and [tax-exempt status](https://www.investopedia.com/ask/answers/08/nonprofit-tax.asp) are given only to organizations that further religious, scientific, charitable, educational, literary, health, or other beneficial causes. Examples of nonprofit organizations include hospitals, universities, charities, churches, and foundations.

A nonprofit must serve the public in some way. It is also required to make [financial and operating information](https://www.investopedia.com/terms/f/form-8282.asp) public so that donors are informed about how their contributions have been used.

To receive a tax exemption, an organization must request 501(c)(3) status from the IRS. Once registered and running, the organization has to maintain compliance with the appropriate state agency that regulates charitable organizations. This often requires a dedicated [CIO](https://www.investopedia.com/terms/c/chief-investment-officer.asp) and accounting team.

NPOs cannot be political. Organizations seeking 501(c)(3) status must state explicitly in their organizing papers that they will not participate in any political campaign on behalf of any candidate or make expenditures for political purposes.

There are 501(c) groups that can engage in political activities, but not 501(c)(3) organizations.

## Operating Rules for NPO Status

Some not-for-profit organizations use only volunteer labor, but many large and medium-size non-profits employ a full-time staff. Despite having special tax advantages in other respects, nonprofits typically must pay employment taxes and abide by state and federal workplace rules.

Nonprofits are allowed to provide assets or income to individuals only as fair compensation for their services. The organization must explicitly state in its organizing papers that it will not be used for the personal gain or benefit of its founders, employees, supporters, relatives, or associates.

## Nonprofit Funding Sources

Nonprofits receive income or donations from a variety of sources. Below are the most common ways nonprofits fundraise and earn revenue.

### Individual Donations

Nonprofits often rely on individual donors who contribute money, goods, or services to support their mission. Donors can give one-time or recurring donations, and they may give through various channels, including via online platforms, direct mail, or events.

Some private companies encourage donations to worthy causes by allowing employees to make automatic donations from their paychecks.

### Grants

Nonprofits may receive grants from foundations, corporations, or government agencies. Grants are typically awarded for specific projects or programs and may require the nonprofit to meet certain conditions or reporting requirements.

Nonprofits usually have to apply for the grant, using an extensive application process.

### Corporate Gifts

Corporations may donate money, goods, or services to nonprofits as part of their [corporate social responsibility](https://www.investopedia.com/terms/c/corp-social-responsibility.asp) initiatives or to support causes that align with their values or mission.

Some companies match donations by their employees who contribute through payroll deductions.

### Major Events

Nonprofits raise money and awareness for their causes by hosting events such as galas and auctions.

These events often involve ticket sales, sponsorships, or auctions of donated goods or services.

### In-Kind Donations

Nonprofits may receive donations of goods or services such as office supplies, equipment, or professional services.

The donating party is eligible for tax benefits by gifting in-kind items.

## Nonprofit vs. Not-for-Profit

The terms nonprofit organization (NPO) and [not-for-profit](https://www.investopedia.com/terms/n/not-for-profit.asp) organization (NFPO) are sometimes used interchangeably. There are, however, key distinctions:

*   A nonprofit must offer some social benefit. A not-for-profit may exist to serve its membership rather than society at large. For example, a sports club may be jointly managed by its members as a NFPO and financed by member fees.
*   NPOs and NFPOs are regulated by different sections of the IRS's [501(c)](https://www.investopedia.com/terms/1/501c.asp) code.
*   Both organization types are tax-exempt, as the income they earn is not subject to tax. But NPOs can deduct dues and donations from their taxable income while NFPOs cannot.

> **Important**
>
> Form 990 is due on the 15th day five months after the organization's taxable year ends. For organizations that have a calendar year-end, Form 990 is due May 15th unless the organization files for an extension.

## Nonprofits and Form 990

Nonprofits are typically tax-exempt entities. However, they are still required to file informational returns to the IRS using [Form 990](https://www.investopedia.com/articles/personal-finance/083115/purpose-irs-form-990.asp).

This tax form provides information about the organization's finances, programs, and activities to the public and the IRS. The form is used by charitable, religious, educational, and other types of tax-exempt organizations. Private foundations, charitable trusts, and political organizations also must file a Form 990.

Form 990 requires organizations to provide detailed information about their revenue, expenses, assets, and liabilities. The form is very different from an individual's tax form as there are many governance questions to ensure IRS compliance.

> **Fast Fact**
>
> Many nonprofits post their completed 990 forms on their websites so that donors, stakeholders, and members of the public can review the organization's financial information and assess its operations and impact.

## Strengths and Challenges

### Strengths

Nonprofits are typically focused on a specific mission or cause. They operate around a central vision, such as addressing a social issue, promoting education or the arts, or providing healthcare to underserved populations. This vision can foster a sense of purpose for staff that may be lacking in a for-profit company.

Because many nonprofits are exempt from federal and state income taxes, they can allocate more of their resources toward achieving their mission and serving their communities. Nonprofits also have access to a greater range of funding sources.

Nonprofits benefit from low-cost or free labor. Volunteers tend to be motivated by a strong sense of dedication to the organization's purpose.

### Challenges

Nonprofits rely on donations, grants, and other sources that can be unpredictable and inconsistent. This can make it difficult for nonprofits to sustain their programs and operations over the long term.

Nonprofits often have limited scalability that can inhibit their ability to achieve their goals effectively.

Nonprofits are often known for generally lower compensation scales than for-profit entities, which can make it difficult to attract and retain talent.

Strengths

*   Contributes to the well-being of its community
    
*   Is often exempt from taxes
    
*   May have a broad range of funding sources
    
*   Often has low labor costs due to volunteers
    

Challenges

*   May have unpredictable revenue streams
    
*   Must comply with regulations and donor stipulations
    
*   Often faces competitive disadvantage in hiring
    

## How Do Nonprofit Organizations Work?

Nonprofits solicit donations from individuals and apply for funding from foundations, government entities, and other sources. They use the proceeds to create and maintain programs that benefit their target community or cause.

Because they are using their income to further a cause, the U.S. tax code allows many nonprofits to be tax-exempt.

## Do Nonprofits Make Money?

A nonprofit must strive to operate perpetually. For this reason, nonprofits may build reserves, show a net profit, and attempt to raise enough money to ensure they can serve their mission for the long term.

They have special accounting needs and rules they must follow and often require specialized accounting software to track their income, expenses, and outflow.  

## Who Actually Owns a Nonprofit?

A nonprofit has no owners or shareholders. It is overseen by a board of directors that dictates and manages the operation of the entity.

The executive director of a nonprofit reports to the board, and the board makes the final decisions on the programs that the nonprofit will pursue.

## The Bottom Line

Nonprofit organizations are typically tax-exempt entities that operate to better the community.

By receiving funds from individuals, corporations, and governments, nonprofits undertake programs and strategies for the public good.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Exempt Purposes - Internal Revenue Code Section 501(c)(3)](https://www.irs.gov/charities-non-profits/charitable-organizations/exempt-purposes-internal-revenue-code-section-501c3)."
>     
> 2.  U.S. Chamber of Commerce. "[Nonprofit vs. Not-for-Profit vs. For-Profit: What's the Difference?](https://www.uschamber.com/co/start/strategy/nonprofit-vs-not-for-profit-vs-for-profit)"
>     
> 3.  Internal Revenue Service. "[Exempt Organizations - Required Filings](https://www.irs.gov/charities-non-profits/exempt-organizations-required-filings)."
>     
> 4.  Internal Revenue Service. "[Frequently Asked Questions About Applying for Tax Exemption](https://www.irs.gov/charities-non-profits/frequently-asked-questions-about-applying-for-tax-exemption)."
>     
> 5.  National Council of Nonprofits. "[Political Campaign Activities - Risks to Tax-Exempt Status](https://www.councilofnonprofits.org/running-nonprofit/governance-leadership/political-campaign-activities-risks-tax-exempt-status)."
>     
> 6.  Internal Revenue Service. "[The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax Exempt Organizations](https://www.irs.gov/charities-non-profits/charitable-organizations/the-restriction-of-political-campaign-intervention-by-section-501c3-tax-exempt-organizations)."
>     
> 7.  National Council of Nonprofits. "[Compensation for Nonprofit Employees](https://www.councilofnonprofits.org/running-nonprofit/employment-hr/compensation-nonprofit-employees)."
>     
> 8.  Internal Revenue Service. "[C. Social Clubs - IRC 501(c)(7)](https://www.irs.gov/pub/irs-tege/eotopicc96.pdf)."
>     
> 9.  Internal Revenue Service. "[Social Clubs](https://www.irs.gov/charities-non-profits/other-non-profits/social-clubs)."
>     
> 10.  Internal Revenue Service. "[Charitable Contribution Deductions](https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions)."
>      
> 11.  Internal Revenue Service. "[Exempt Organization Filing Requirements: Form 990 Due Date](https://www.irs.gov/charities-non-profits/political-organizations/exempt-organization-filing-requirements-form-990-due-date)."
>      
> 12.  Internal Revenue Service. "[About Form 990, Return of Organization Exempt from Income Tax](https://www.irs.gov/forms-pubs/about-form-990)."