What is a Nonprofit Organization (NPO)? Definition & Example

Ethical entrepreneurship is a growing movement among business owners and organizations. 

As there are endless causes to support around the world, establishing a business that also has the goal of supporting political, religious, medical, or other movements is commendable. 

The most popular and contemporary way to set up an ethical business is to adopt a nonprofit structure. 

You may be wondering: what exactly is a nonprofit organization? In this article, we’ll dive into the most essential points that you’ll need to consider when starting a nonprofit. 

Additionally, we’ll outline the qualifications to be a nonprofit, the types of nonprofit organizations, the differences between a nonprofit and a not-for-profit organization, and the steps for starting a nonprofit.

Key Takeaways

• Nonprofit organizations are special companies that champion social causes and advocacies in a range of social, scientific, and humanitarian fields.
• To be a nonprofit, the organization must have a mission and exercise political activism. As partners towards change, nonprofits should help promote welfare and advance fair pay.
• Different kinds of nonprofit organizations exist today, such as charity, social welfare, agricultural, social, and recreational, as well as those dedicated to labor unions.
• Although nonprofits seek change, there are many challenges in this journey such as financial barriers, capped profits, and reliance on alternative funding sources like donations and grants.

What is a Nonprofit Organization (NPO)?

A nonprofit organization is a company that is developed without the intention of making a profit, but which champions a cause the business is passionate about. 

These organizations are exempt from taxes, as they are seen as an essential component of society that makes the country better. 

Nonprofit organizations can include (but are not limited to) churches, some universities, research institutions, social causes, and political campaigns. 

As per the National Center for Charitable Statistics (NCCS), there are approximately 1.5 million nonprofits in the U.S.

The nonprofit structure was developed based on the first-ever organization to resemble the structure in the mid-1800s: the Peabody Education Fund. 

This organization was tasked with academically integrating formerly enslaved people into southern society, which was a very noble cause.

What are the qualifications to be considered a nonprofit?

There are a few criteria that must be met if you are to be considered a nonprofit organization.

• Political activity – is necessary in a nonprofit organization if you choose to go down the legislative route. This can include educating the public on state policies, organizing fundraisers for campaigns, and other activities. 
• Fair pay – defines a few different types of compensation. Fair pay involves pay equity, consistent salary increases, and reasonable pay structures across the organization.
• Promoting welfare – refers to the underlying mission of your organization being a mission of service to public welfare. 
• Adherence to mission – In order for your nonprofit to remain in business, you are required to adhere to the mission that underlies your organization.

This means consistently staying involved in current events and affairs surrounding your cause and contributing when appropriate.

Nonprofit Organization Examples

The biggest example of a nonprofit organization is the church. 

However, other examples include the World Wildlife Fund (their mission is to protect endangered species) and Habitat for Humanity (their mission is to make sure people can gain permanent housing).

Nonprofit Funding Sources

In order to rain money for your nonprofit, there are multiple avenues that you can consider.

Choose the method that best aligns with your business objectives.

1. Individual donations – Individuals can donate to nonprofits plainly, but nonprofits often receive individual donations through engagement with the public. For example, a nonprofit aquarium receives money from patrons and other sea life engagement activities that cost money.
2. Grants – are official financial contributions made by other organizations to support the cause of your nonprofit. Grants are often thought of as being for scientific research, but grants cover a lot of other missions.
3. Corporate gifts – can include volunteer work or matching gifts, where members of an organization elect to donate their money or time to your nonprofit. 
4. Major events – can range from dinner parties to scientific conferences. Attendance to these events typically comes with a base fee, which then participants can add their own contributions on top of. 
5. In-kind donations – are non-financial. Instead, people donate the items that the organization would have used the money to buy anyway, such as paper products or catering.

Types of Nonprofit Organizations

Here are the five nonprofit organizations to consider if you decide to open your own nonprofit.

501(c)(3) organizations

This is a charitable organization where none of the revenue can go to a private shareholder and it cannot be operated for individual interest.

501(c)(4) organizations

These are social welfare organizations or associations of employees (such as homeowners associations).

501(c)(5) organizations

This organization structure is provided to horticultural or agricultural cooperatives. The net earnings of this organization cannot go to any member for the purpose of gaining wealth.

501(c)(7) organizations

This is another tax-exempt designation that is for social and recreational clubs, usually requiring membership from its patrons (like the YMCA).

501(c)(9) organizations

This is most commonly associated with labor unions giving workers health and welfare benefits, as well as reasonable pay for the work that they do.

Additionally, labor unions protect workers from being paid less or overworked.

Pros and Cons

Here is an analysis of the pros and cons associated with starting a nonprofit organization.

Pros	Cons
Activism is central to the business model	Financial barriers
No corporate tax	Capped profits
Addresses various social, scientific, and humanitarian issues	Employees receive limited compensation
Access to funding	Reliance on donations

Nonprofit vs. Not-for-Profit

Here’s another comparison: this time, we’ll look at the differences between nonprofit and not-for-profit organizations.

Nonprofit	Not-for-profit
Describes US-based, tax-exempt, mission-driven organizations.	Typically describes non-US, tax-exempt, mission-driven organizations.

If you open a charitable business in the United States, you would file to become a nonprofit organization.

How to Start a Nonprofit Organization

Now that you’re well-versed in all of the nonprofit essentials, here is a list of all of the items to check off of your list when starting a nonprofit:

1. Complete and file articles of incorporation – Articles of incorporation are like your business constitution. It outlines who runs the nonprofit and its name, as well as other important information. However, a nonprofit’s articles of incorporation document differs from a traditional S Corp or C corp document as there are no shareholders in the company.
2. Draft and adopt bylaws – Bylaws are essential for organizing your nonprofit. They provide the grounds for holding a meeting or keeping track of the management structure. If you want to create bylaws, here is a template for doing so. 
3. Apply for an EIN – The employee identification number (or tax number) is important for record-keeping purposes with the IRS, but nonprofit organizations are tax-exempt.
4. Apply for federal tax exemption – You must apply for the tax exemption to ensure that you are truly a nonprofit structure in terms of mission and financial objectives.
5. Register as a charity with the appropriate state authority – You will need to register as a charitable organization with the state that the organization is based in.

Visit your state business website for nonprofits to fill out and submit their application.

Becoming a Nonprofit Organization

You’ve made it to the end! Nonprofit organizations are really great for society and they can also be perfect for business owners.

If you have remaining questions, take a look at the FAQ below; hopefully, your answer is there. 

Otherwise, it is recommended that you reach out to a legal professional to decide if opening a nonprofit is right for you.

No matter what you decide, entrepreneurship is an amazing journey!

FAQs

Related reading:

• Nonprofit vs. LLC
• 13 important nonprofit statistics