Definition of a Nonprofit

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Nonprofit organizations come in all different sizes and with very different purposes. Whether nonprofit organizations work to serve children or dolphins, have many employees or few, they all must meet certain legal requirements to be considered a nonprofit.

In the most general terms, a nonprofit organization is any company that takes all of its earnings and uses them to help something or someone. While nonprofit organizations are like for-profit corporations in that they have a board of directors, they do not have shareholders or pay dividends to them. While the term ''nonprofit organization'' is often loosely applied, it generally means a nonprofit organization that is recognized by the federal government.

Most nonprofit organizations have been given status as a 501(c)3 entity by the Internal Revenue Service. To attain this status, aspiring nonprofit organizations are carefully screened by the IRS to verify that their activities are of a charitable nature and not for profit. If the organization passes this screening, it is no longer required to pay federal income taxes on any money it makes or is given.

Most nonprofit organizations are organized with a board of directors and program directors. Roughly speaking, a board of directors runs the organization while the program director makes sure their mission statement is accomplished. Most states have laws requiring that a nonprofit have at least two people listed as the organization's board of directors.

Beyond the 501(c) 3 designation that most nonprofit organizations carry, many nonprofits also apply for state-level tax status that entitles them to further tax exemptions on income or sales.

Nonprofit organizations were meant by the government to be charitable organizations. If a nonprofit is found to be defrauding either the government or people who have contributed to their causes, the IRS can choose to revoke that organization's 501(c)3 status.
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