- A nonprofit organization must be formed with the intent to serve some public service. This can be serving specific members of an organization or the wider public.
- Nonprofits include organizations designed for many different purposes. These include charities, foundations, social welfare/advocacy, professional/trade associations and religious organizations. Well-known organizations that qualify as nonprofits include the American Red Cross, churches, the National Association for the Advancement of Colored People and the Ford Foundation.
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The federal government uses the National Taxonomy of Exempt Entities to classify nonprofits into one of the following groups: arts, culture, humanities; education; environment and animals; health; human services; international, foreign affairs; public societal benefit; religion related; and mutual/membership benefit.
Additionally, nonprofits are given a section number that typically ranges from 501(c)(1) to 501(c)(25). Exceptions include religious organizations, which fall under section 501(d); cooperative hospital service organizations, which fall under section 501(e); cooperative service organizations or operating educational organizations, which fall under section 501(f); farmers' cooperatives that qualify under section 521; and political organizations that fall under section 527.
These sections are important in federal tax code, tax filing and exemption status. Additionally, the type of section that the nonprofit falls under will determine what type of organizations it can legally participate in and keep its nonprofit, tax-exempt status. Many sections cannot contribute to political campaigns, for example. -
Directors of nonprofits are typically shielded from the debts of their organization, much like directors of for-profit organizations are. Although nonprofits can be exempt from paying most federal taxes, they are not completely tax exempt. To qualify, the organization must submit two applications to the IRS. The first is an application for an Employer Identification Number, and the second is Form 1023 or 1024.
In most cases, sales tax must be paid, and employment taxes must be paid as well. Some states will wave sales tax for nonprofits. Additional taxes made be required, depending on annual profit of the organization. - Nonprofits can make profits. However, they differ from other organizations in that they cannot exist solely for the purpose of making a profit. Not all donations to nonprofits are tax deductible.
