Not for Profits and Nonprofits are business structures which can, and should make a profit. The differences between the two business structures are tax deductible donations, governance structure, and mission.
Nonprofit organizations are granted their tax exempt status through an application process to the IRS (Internal Revenue Service). Articles of Incorporation and By Laws, focused on a mission of serving the public good, support an application to the IRS seeking nonprofit status. If the IRS approves the application based on the mission and governance documents of the organization they will assign one of 30+ nonprofit classifications to the organization. To maintain tax exempt status granted by the Internal Revenue Service the nonprofit must submit annual financial reports to the IRS. The organization’s annual IRS report will show the level of public support and activity in support of the public service mission as defined in the organization’s By Laws and IRS application.
Nonprofit status can be revoked by the IRS if the organization fails to provide annual financial reports, and/or those reports show the organization has strayed from its mission serving the public good.
Nonprofits can earn money and make a profit. The earned revenue, from provided services, donations, and grants stays within the organization to continue supporting the programs and services which fulfill the mission. No additional revenue or profit may be paid to any Board member. Nonprofits do not pay tax on this revenue. However, nonprofits are still required to pay payroll taxes. For unrelated business income or taxes check with your tax accountant, as a nonprofit designation does not absolve nonprofits of all taxes.
Not for Profits revenue also remains within the not for profit in order to support the organization. However, a not for profit need not be formed for the purpose of a public good. Member associations are often not for profits as they only serve their members, not the community at large. A garden club or beekeeping association would still apply to the IRS for tax exempt status. The classification assigned to a member association will allow the not for profit to not pay sales taxes on products purchased to serve the members and the association. However, donations to the member association are not tax deductible. The classification for a member association does not include the ability for the group to receive grants.
The IRS makes the differentiation between nonprofit and not for profit based on the By Laws and stated mission of the organization. It is important to understand these distinctions prior to preparing your new group’s By Laws, as the IRS classification can constrain your ability to serve your members and the community through grant funding and donations from members. A 501c3 nonprofit can receive member dues, grants, and donations for 4-H scholarships, speakers for member meetings, and a community garden, for example. A 501c5 member association relies on only the membership for funds, and services are only provided to the membership. Member dues and financial support are not tax deductible as a charitable donation. Member support may be a business deduction for the individual member, but always check with your tax accountant to verify any prospective donation.
Typically, Not For Profits are run by volunteers. While, nonprofits can have paid employees serving the mission of serving the public good.
Once the IRS determines your organizational status and classification you cannot simply change it. If you change the mission of your nonprofit or not for profit that would change your nonprofit status, and the IRS will require your organization to dissolve the old entity and start a new one, based on the new mission.
Many beekeeping member associations have realized the restrictions of their IRS classification constraining their growth, and limiting their service even to their members. Some state organizations have opted to create a sister organization as a 501c3 to complement their 501c5 member association. However, starting a second nonprofit requires a separate Board, separate By Laws, separate IRS annual reports. Contact LEAD for Pollinators or your State’s Association of Nonprofits for guidance concerning a sister nonprofit, or phasing out a 501c5 and starting a new 501c3 nonprofit.
Nonprofit vs. Not-for-Profit vs. For-Profit: What’s the Difference?
Not for Profit vs Nonprofit: Everything You Need to Know
501c5 nonprofit IRS classification
501c3 nonprofit IRS classification