Last Updated on March 8, 2021 by Filip Poutintsev
A Non Profit Organization is an institution that conducts its events to assist other individuals, groups or causes rather than gaining profits for themselves. Also known as non-business entities, these organizations could operate in diverse settings including poverty, religion, science, research, and education.
They don’t comprise any stakeholders; the profit generated isn’t distributed among the members or directors. Since nonprofits are tax-exempt, they don’t pay income tax either. All the surplus revenue they generate is used to ultimately achieve their objective.
There are millions of nonprofits across the world with over 1.5 million in the US alone. These could be private foundations, public charities, or NGOs, among others. The bottom line is that they must exist to help improve causes like community, nature, human rights, and animal rights just to name a few. The more these institutions focus on their mission, the more public confidence they gain, as a result, more money for the organization.
Even beyond tax exemption, there are several reasons why nonprofit status is a good idea. However, the challenges involved aren’t negligible either. Let’s take a further look at the pros and cons of nonprofit organizations before jumping into conclusions.
Pros of Non Profit Organizations
Nonprofits are eligible for benefits that do not apply to for-profit organizations because they work towards the public good. Let’s take a look at a few of their benefits.
1. Tax-Exempt Status
A nonprofit qualifies for favored tax status; it is exempt from federal, state and local taxes. This tax-exempt allows nonprofit organizations to use more of their financial resources on accomplishing their goals.
2. Limited Liability
A non profit organization limits personal liability; the members of the nonprofit receive protection from personal liability. For instance, if a legal judgment exceeds what the nonprofit can pay, the claimant won’t be able to collect the remainder from the organization’s members.
Unless a director or an officer causes some kind of harm or fraudulent activity, he/she won’t be held personally liable.
Another benefit for a nonprofit is that it is eligible for government and private sector grants and can receive contributions from individuals. Despite the extensive application process, a grant helps founders with limited funds begin to scale their institutions.
4. Founders are Kept Separate from the Organization
In case there is a lawsuit, fine, debt, or similar legal matter involved with the organization, the personal assets of the individual founders are kept separate from the business structure, meaning they’re risk-free.
There is an advantage here in the fact that board members and employees of a non-profit organization receive similar protections. The only issue that pierces this shield is if the individual in question acts unethically or illegally.
5. Allows You to Do a Good Deed
While working in a for-profit business could just mean paycheck for some, being a part of a nonprofit makes people feel like they’re contributing to society. Founding a non profit organization gives them a chance to feel like they are contributing to eliminate an existent problem in society.
6. Motivation and Leadership
People working for nonprofits claim to feel motivated throughout their work because they feel like their contribution is treasured.
Since they generally work for the betterment of society, they gain a sense of satisfaction which motivates them to further keep contributing. Along the way, they develop leadership skills as well.
Cons of Nonprofit Organizations
Despite the benefits, there are several downsides to starting a nonprofit organization. Some of them are explained below.
1. Lack of Funds
In non profit organizations, the major source of funds is through donations. You’re asking people to donate either cash or other assets out of the goodness of their hearts. And, in all honesty, everyone won’t like the idea of donation. That means funds could be a big issue in nonprofits.
2. Low Pay
A nonprofit doesn’t reward you as much for your work as a for-profit corporation would. It is because the profit generated by a nonprofit must be put back into the company operations; being a part of profit-sharing isn’t possible.
3. Paperwork and Administrative Costs
Compared to the paperwork required in starting a for-profit, the paperwork involved in starting a nonprofit is more. It requires you to fill up tax forms and nonprofit incorporation to qualify. To ensure that all the paperwork is filled out correctly, it is better to hire an accountant and a lawyer. All of this adds up to more fees and requirements.
4. Loss of Tax Status
A non-profit can lose its tax status. If it misses its annual reporting deadline, it may not be allowed to continue qualifying for its tax-exempt status. The deadlines, in this case, are very strict.
5. Competition for Funding
As mentioned earlier, non-profit organizations rely on grants, donations, and authorized investments to fund their affairs. With thousands of agencies competing for these resources, there is no guarantee of receiving the fund of your choice. You should have a proper business plan and vision if you want to get noticed.
6. Public Scrutiny
Since a nonprofit is dedicated to the public, its finances are open to public inspection. This means that the public can get copies of tax returns and can find out its salaries and expenditure. This could be used against the good of the organization.
We can conclude that the key aspects of nonprofits are accountability, trustworthiness, honesty, and openness to every person who has invested time, money, and faith in the organization.
As long as the organization has public confidence, it can prosper well, but once they deviate from their mission, people lose their faith in them which results in their downfall.
However, as long as you’re ready to face the challenges and your business idea is one that can help provide a general good to your local community, you’re good to go.