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Am I a ‘Non-Profit’ because I don’t make any money?

I have been asked this question more than once by people not making money with their business.  The short answer is ‘no’. Being a non-profit really has nothing to do with making money. Or taxes. Or profit. Or doing good things.

What’s the difference between a non-profit and a for-profit?

Let’s look at what is the same:

  • Both conduct activities to make money (sell products, charge admission or membership fees, etc.)
  • Both are run by a board, even if it is only one person.
  • Both are governed by by-laws.
  • Both have a mission to fulfill.
  • Both are entities set up by the state and treated as a separate taxpayer.

They are both exactly the same with only ONE difference – Non-profits do not have stockholders/ investors /owners.

The main goal of any for-profit business is to make a profit for the owners. They invest their money (buy stock) and the people who work there (board chair down to the janitor) are expected to help make money for the investors. That’s it. For-profit businesses are there to make money for the owners and investors.

When you remove the ownership factor, you can also remove the profit motive. Non-profits are not in business to make money.

No ownership? But it’s MY non-profit! I started it. I do all the work.

No. You may have elected yourself president. You may do all the work and come up with all the ideas. It’s not YOUR baby, though. You are leading it now, but unless you formally close it, it will live on and others can and will run it long after you are gone.

Being a non-profit means that I do good in the community, right?

No. There is no legal link between being a non-profit and doing good deeds. Lots of things are formed as non-profits. Drinking establishments that are a “private club” are non-profits. So are homeowners’ associations, POAs. So are political lobby groups and political action committees. So are credit unions. Remember that the only difference is ownership. There is no requirement to do good deeds if you are a non-profit.

What about taxes? If I’m a non-profit, I don’t have to pay, right?

No, again! This part gets a little tricky. Sometimes state law and federal law overlap. You can be a non-profit in your state and never request special tax status with IRS. In that case, the IRS requires that you file a corporate tax return and pay taxes on any “profit” you might have earned.

If you do request special IRS tax status, you can still owe excise taxes and business taxes. Not all your income or activities are tax-free. If you have money left over at the end of the year, in investors/owners business world, this would be ‘profit’. In a non-profit, the is called the ‘increase in fund balances’ and isn’t taxed as profit. However, if you continually build your fund balances and show no plans for using them, the IRS can audit you make you pay corporate income tax because you are not using the money to fulfill your mission. An example of this is POAs/ HOAs collecting fees from its residents year after year and never using the money to pave the road.

I can accept tax-deductible donations, right?

One more time: No! Only 501(c)(3) charities can accept tax-deductible donations. Charities are a very tiny portion of non-profits. There are 26 other types of non-profits under the IRS code that can’t accept tax-deductible donations. Labor unions, insurance companies, pension funds, and cemeteries can all be non-profits, and none can accept tax-deductible donations.

Well at least I don’t have to file tax forms, right?

(Ready for this?) No! You file far more complex forms with the IRS in order to not pay federal income tax. The forms you file become public information, and anyone can look at how you spend your money. You also file additional forms with your state if you are canvassing or fundraising or trying to influence legislation or get someone elected. If you got any grant money, you report back to the people who gave you the money regularly to show how you spent it.

 

Then what’s the point?

So if I can’t take donations, I still have to pay taxes, there’s more paperwork, and I don’t even own it, what’s the point of being a non-profit? Sometimes your state law requires it (credit unions, POAs, private clubs selling alcohol). Sometimes you are required to be a 501(c)(3) charity to be eligible for a grant. Sometimes you just need to make a change in the world. These are all good reasons.

An inability to make money is NEVER a reason to be a non-profit.

 

Like this post? Check out more from Grass Roots Taxes:

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What Happened to the W4?

What to Bring to Do Your Taxes

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