Definition
The term “Not for Profit” refers to a type of organization that does not earn profits for its owners. All of the money earned or donated to a not-for-profit organization is used in pursuing the organization’s objectives and keeping it running. Typically, not-for-profit organizations are charities or other types of public service organizations.
Phonetic
The phonetic pronunciation of “Not for Profit” would be: “naht fawr prah-fit”
Key Takeaways
- Primary Purpose: The primary purpose of Not-for-Profit organizations is not generating profits but to focus on serving the community, promoting a cause, or advancing a social issue. Any profits made are utilized for furthering the organization’s mission rather than being distributed to stakeholders.
- Tax Exemptions: Not-for-Profit organizations often receive special treatments regarding taxes. As these organizations undertake activities aimed at the betterment of the society, they are typically exempted from most federal and state taxes.
- Funding Sources: Not-for-profit organizations rely heavily on funding from various sources such as donations, government grants, fundraising events and philanthropic activities. Unlike for-profit entities, they do not rely on selling goods or services to customers for their revenue.
Importance
The term “Not for Profit” is important in business/finance as it refers to a type of organization that does not earn profits for its owners. All money earned by or donated to a not-for-profit organization is used to pursue the organization’s objectives and keep it operational. These organizations primarily serve societal, environmental, or communal purpose, rather than aiming solely for monetary gain. Understanding this term is crucial for differentiating these organizations from profit-driven businesses, as they have unique legal and financial requirements, including tax exempt status and mandatory reinvestment of revenues back into the organization’s cause.
Explanation
The main purpose of a not-for-profit organization is to provide services and support to a community or cause without seeking to generate a profit. These organizations, which can include charities, schools, and hospitals, among others, work towards achieving a mission or purpose that benefits the public or a particular group of people. Instead of distributing profits to shareholders or owners, these entities reinvest any extra income back into the organization to further its mission, improve services, or expand operations.Not-for-profit entities are used in a variety of sectors to address issues or provide services that for-profit businesses may not deem profitable. For example, a not-for-profit might be established to provide food aid, fund research for rare diseases, protect the environment, or promote the arts. These organizations can bridge the gaps left by both the private and public sectors, providing essential services and advocating for social, cultural, or environmental causes. They play a crucial role in society, making contributions to education, health care, and many other areas.
Examples
1. American Red Cross: The American Red Cross is a not-for-profit organization that provides emergency assistance, disaster relief, and disaster preparedness education in the United States. While they do make money through donations, fundraising, and training and selling certain products, these funds are reinvested back into their mission and not distributed to any owners or shareholders.2. World Wildlife Fund (WWF): As one of the world’s most prominent conservation organizations, WWF uses its revenue to promote conservation efforts across the globe. This not-for-profit does earn money, but instead of going to shareholders, this revenue supports research, advocacy, and conservation initiatives.3. United Way Worldwide: This not-for-profit focuses on improving education, helping people achieve financial stability and promoting healthy lives. Although it earns income through fundraising, donations and government grants, all of the earnings are used for the betterment of the communities they serve, rather than for private profit.
Frequently Asked Questions(FAQ)
What is a Not for Profit organization?
A Not for Profit organization is a type of entity that doesn’t seek to make profits for its owners. Instead, any money earned goes back into the organization to advance its goals or mission.
How do Not for Profit organizations make money?
Not for Profit organizations primarily make money through donations, grants, membership fees, and earnings from events or products. They also often receive tax exemptions due to their charitable status.
Are Not for Profit organizations allowed to make a profit?
Yes, Not for Profit organizations can make a profit. However, any profit made should be reinvested into the organization to further its mission or cause, rather than being distributed to owners or shareholders.
How do Not for Profit organizations differ from for-profit organizations?
The primary difference is the distribution of profits. While for-profit businesses can distribute their earnings among owners or shareholders, Not for Profit organizations reinvest any profits back into the organization to further its purposes.
How is a Not for Profit organization governed?
Not for Profit organizations are usually governed by a board of directors or trustees. This board oversees the strategic direction of the organization and ensures its commitment to its mission.
Do Not for Profit organizations pay taxes?
In many cases, Not for Profit organizations are exempt from certain taxes, such as income and property taxes. However, they are typically required to file annual reports with the IRS to maintain their tax-exempt status.
Can employees of a Not for Profit organization be paid?
Yes, employees and staff of a Not for Profit organization can and often do receive salaries. However, in the United States, compensation must not be excessive, as per IRS guidelines.
Can anyone start a Not for Profit organization?
Yes, anyone can start a Not for Profit organization. However, it does involve several legal steps, like filing a mission statement, drawing up bylaws, and applying for tax-exempt status from the IRS.
Are all Not for Profit organizations considered charities?
Not necessarily. While all charities are Not for Profit organizations, not all Not for Profits are charities. The primary difference lies in their objectives and the way they distribute their earnings.
What are some examples of Not for Profit organizations?
Examples can include churches, public schools, public charities, public clinics, legal aid societies, volunteer services organizations, labor unions, professional associations, research institutes, museums, and some government agencies.
Related Finance Terms
- Donations
- Charitable Organization
- Non-profit Taxes
- Volunteer Work
- Grant Funding
