What is a Nonprofit?

Nonprofits. Cooperation Environment Charity Concept. Nature Support,Volunteer People, Social. Professional Corporate Business Environment and Achieve. In the United States of America, there are over 1.3 million nonprofit organizations, and they are known for the good that they do in the world and the positive impact that they have on the lives of others, the environment, the economy, and the strength they bring to our communities. Nonprofits work to educate, feed, shelter, heal, inspire, nurture, and enlighten people throughout the world. They are also, legally, under certain obligations and abide by specific laws and tax codes. "Nonprofit" can mean different things for different people, but we'll dive into the details of what they are "on paper."

Nonprofits and Tax Codes

Nonprofits are also interchangeably referred to as "tax-exempt" organizations. There are different sections of the tax code that Congress has created for almost 40 types of tax-exempt organizations. These include:

  • Section 501(c)(4): Social welfare organizations, volunteer fire organizations, homeowner associations.
  • Section 501(c)(5): Labor unions
  • Section 501(c)(6): Chambers of Commerce
  • Section 501(k): Child care organizations
  • Section 501(c)(3): Public charities (aka charitable nonprofits) and private foundations, including churches and religious organizations.

All of these sections identify certain conditions that must be met to be exempt from paying federal income taxes. The most common condition is that these organizations are not to pay out profits, hence the term "nonprofit."

How can nonprofits make profits?

But wait... if they profit, how are they "nonprofits"? The term "nonprofit" stems from the tax code condition that "no part of the organization's net earnings can inure to the benefit of any private shareholder or individual." This is where "nonprofit" is a bit of a misnomer because nonprofits can actually make a profit (and must, in order to build a reserve fund and ensure their sustainability).

The main difference between nonprofits and for-profit organizations is that nonprofits can't give its profits to a private individual (but they may pay reasonable compensation for services). This is because tax-exempt nonprofits were designed to benefit the public, not serve private interests. For-profit organizations always serve private interests.

Myths About Nonprofits

The idea that "nonprofits don't make a profit" is one of the myths that many believe about nonprofits, and there are many other myths as well. Let's take a look at those.

Myth 1: Most Nonprofits are Large and Have a Lot of Resources

This is false. Most nonprofits are small, with small budgets and a limited number of employees. Plus, the number of volunteers can vary widely depending on a number of factors. The budget of most nonprofits is so small, in fact, that 92% of all reporting public charities reported annual revenues of less than a million dollars. So when you see nonprofits like the Red Cross, keep in mind that they represent a very small minority of nonprofits that have high visibility and a vast amount of resources.

Myth 2: Nonprofits Should Have Low Overhead Costs

The reality is that if a nonprofit is run effectively and as it should be, the overhead costs are near identical to a well-run for-profit organization. Just because they are classified differently doesn't mean that costs are any different to run things. Utility bills, rent, office equipment, and other equipment needed to run an organization are no different for nonprofits.

Overhead costs should never be an indicator of how effective a nonprofit is, just as they will never be an indicator of how effective a for-profit is. The only main difference you will typically see in overhead for a nonprofit versus a for-profit organization is that nonprofit employees are typically underpaid for the work and services they provide compared to a for-profit organization.

Myth 3: Most Funding for Nonprofits Comes from Foundations

Foundation grants are small potatoes. They represent a very small percentage of the total dollars contributed to charitable nonprofits each year- 2.9% to be exact. (2019, National Council of Nonprofits)

Private philanthropy (which includes donations and bequests from individuals and grants from private and corporate foundations) only represents 14% of total annual revenue, with most of that coming from individuals! This is why individual donations are so important for nonprofit organizations. Every personal donation really does make a significant difference for nonprofit organizations.

Myth 4: Nonprofits Aren't Able to Lobby

Every single nonprofit organization is able to lobby (i.e. permitted by law) and should lobby! Most nonprofits are huge advocates for things that truly matter, like humanity, the environment, animals, and so much more. Their voices are the ones we want to hear when it comes to policies, laws, and regulations, because they are in it -- on the front lines, so to speak, on most meaningful issues.

They are NOT, however, allowed to engage in any partisan political activity, including supporting or opposing candidates for public office.

How to Decide Which Nonprofit to Donate to

There are so many nonprofits throughout the U.S., as we stated before. So the question is, how do you choose with one to donate to? Here are some great questions to guide you in your decision:

  1. What causes interest you or are you passionate about?
  2. Do you want to support an organization that is serving a specific type of cause? Such as human rights, human empowerment, the environment, child welfare (SHP is included in this category), etc?
  3. Do you want to focus your donations locally, nationally, or internationally? (We do all three!)
  4. Do you prefer to give monetary donations or physical item donations?
  5. Are you open to giving to something you aren't necessarily passionate about but you know it's a huge need?

No matter what you decide, you're making a huge difference in the world! It's because of generous donors like you that nonprofit organizations are able to continue their work throughout the world.

If you are considering donating to SHP, we encourage you to learn more about us and our mission to keep kids off the floor in our towns. At SHP, we fully believe that a bed is a basic need for the proper physical, emotional, and mental support that a child needs. When it was brought to our attention that the need for beds went far beyond our own neighborhoods, we stepped up and took initiative. We're a national organization answering the call to a national problem.

LEARN MORE ABOUT MAKING A DONATION TO SHP