Non-Profit Organizations
A nonprofit is a tax-exempt organization that serves the public interest. In general, the purpose of this type of organization must be charitable, educational, scientific, religious or literary. This is a common and broad definition that fits the type of information. The public expects to be able to make donations to these organizations and deduct these donations from their federal taxes.
Legally, a nonprofit organization is one that does not declare a profit and instead utilizes all revenue available after normal operating expenses in service to the public interest. These organizations can be unincorporated or incorporated. An unincorporated nonprofit cannot be given federal tax-exempt status or the designation of being a 501(c)(3) organization as defined by the Internal Revenue Service. When a nonprofit organization is incorporated, it shares many traits with for-profit corporations except that there are no shareholders.
When starting a nonprofit corporation, the organization must file articles of incorporation with the state in which it resides or decides will be its jurisdiction for legal purposes. This is the same process a for-profit corporation must follow. Each state has various rules and regulations, but most require officers of the corporation, a board of directors, by-laws and annual meetings. Most states also require nonprofit organizations to register with state charity bureaus or other agencies and adhere to reporting requirements particularly involving fundraising operations.
When a nonprofit corporation is given tax-exempt status, it is exempt from paying federal corporate income tax. While these types of organizations also are often exempt from paying state and local sales tax, property tax and taxes on other assets, this is not always the case as states have different rules. Tax-exempt nonprofits also can benefit from lower postal rates.
Nonprofit organizations have paid and volunteer staff, but employment taxes and federal and state workplace rules are generally no different than those imposed on for-profit organizations. A perception is that salaries in the nonprofit world are low and while this is generally true, the type of nonprofit organization can make a huge difference in how closely it compares to a for-profit business.
Universities, hospitals and large national charities are examples of organizations that can be "nonprofit" but have salary scales on par with almost any for-profit corporation. CEOs of major hospitals can commonly earn salaries and bonuses of $500,000 to over $1,000,000. University presidents can have similar scales. However, local literacy training centers or a food banks generally will be places where lower salaries are supplemented by payment in a smile from an adult who reads a first book or a family with enough food for everyone to eat a meal.
A nonprofit organization can have clients, can offer products and services, will need revenue, should market itself, and must be concerned about customer satisfaction whether in those assisted or those who contribute donations in support of operations, programs or services. It is a business that must serve the public interest and it will succeed or fail as any business will, depending on how well it is operated.
Advantages of Non-Profit
Nonprofit corporations that qualify for 501(c)(3) status enjoy the following advantages:
Starting a nonprofit organization and applying for tax exemption with the Internal Revenue Service is a lengthy process. Upon approval of the tax exempt status, there is ongoing reporting compliance and tax filing obligations every year in order to maintain the tax exempt status.
Compliance Requirements
Independent audits are mandatory for some nonprofits. The IRS does not require nonprofits to obtain audits, but other government agencies do. For example, the federal Office of Management and Budget (OMB) requires any nonprofit that spends $750,000 or more in federal funds in a year (whether directly or by passing the money on to other nonprofits) to obtain what is termed a “single audit” to test for compliance with federal grants management standards. In addition, approximately one-third of all states require nonprofits of a certain annual revenue size to be audited if they solicit funds from their state’s residents. The revenue thresholds vary from state to state. California requires annual audits for nonprofits registered with the state that have gross income of $2 million or more. Other states have lower income thresholds. Finally, some funders, such as foundations, will not provide funding to a nonprofit unless they receive audited financial statements. The same holds true for many banks and other potential lenders.
There are two cheaper alternatives to a full-blown independent audit. The first is called a review, which is like a mini-audit. A CPA examines your financial records, but much less thoroughly than in a full-blown audit. Unlike an audit, the CPA does not express an opinion as to whether your financial statements are in accordance with GAAP. Instead, the accountant merely states whether he or she is aware of any material modifications that should be made to the financial statements for them to be in conformity with GAAP. A review costs about half as much as an audit. Many funders will accept a review instead of an audit, but a review is not an audit and it may not be referred to as such.
The cheapest alternative to an audit is a compilation. This is where an accountant assembles your financial statements from the information you provide. The accountant does not subject your financial records to any audit or review and thus can express no opinion at all as to whether they comply with GAAP.
State Requirements
A few states have laws that require nonprofits that receive a certain level of state funding to submit independent audits to the state agency that provided the funding or to other state agencies. If your nonprofit receives any government funds --state or federal -- it is always a good idea to determine whether there is an accompanying audit requirement. State laws regulating independent audits are different state-by-state.
Massachusetts
Statute and Description: Mass. Gen. Laws ch. 12, § 8F | A public charity with gross annual support and revenue over $500,000 must file an audited financial statement prepared by an independent CPA together with its annual report. A public charity with gross annual support and revenue less than $500,000 and more than $200,000 must file a financial statement that is either reviewed or audited by an independent CPA.
Applying for federal tax exemption is a lengthy process. We are experienced for applying for federal tax exemption status.
A nonprofit is a tax-exempt organization that serves the public interest. In general, the purpose of this type of organization must be charitable, educational, scientific, religious or literary. This is a common and broad definition that fits the type of information. The public expects to be able to make donations to these organizations and deduct these donations from their federal taxes.
Legally, a nonprofit organization is one that does not declare a profit and instead utilizes all revenue available after normal operating expenses in service to the public interest. These organizations can be unincorporated or incorporated. An unincorporated nonprofit cannot be given federal tax-exempt status or the designation of being a 501(c)(3) organization as defined by the Internal Revenue Service. When a nonprofit organization is incorporated, it shares many traits with for-profit corporations except that there are no shareholders.
When starting a nonprofit corporation, the organization must file articles of incorporation with the state in which it resides or decides will be its jurisdiction for legal purposes. This is the same process a for-profit corporation must follow. Each state has various rules and regulations, but most require officers of the corporation, a board of directors, by-laws and annual meetings. Most states also require nonprofit organizations to register with state charity bureaus or other agencies and adhere to reporting requirements particularly involving fundraising operations.
When a nonprofit corporation is given tax-exempt status, it is exempt from paying federal corporate income tax. While these types of organizations also are often exempt from paying state and local sales tax, property tax and taxes on other assets, this is not always the case as states have different rules. Tax-exempt nonprofits also can benefit from lower postal rates.
Nonprofit organizations have paid and volunteer staff, but employment taxes and federal and state workplace rules are generally no different than those imposed on for-profit organizations. A perception is that salaries in the nonprofit world are low and while this is generally true, the type of nonprofit organization can make a huge difference in how closely it compares to a for-profit business.
Universities, hospitals and large national charities are examples of organizations that can be "nonprofit" but have salary scales on par with almost any for-profit corporation. CEOs of major hospitals can commonly earn salaries and bonuses of $500,000 to over $1,000,000. University presidents can have similar scales. However, local literacy training centers or a food banks generally will be places where lower salaries are supplemented by payment in a smile from an adult who reads a first book or a family with enough food for everyone to eat a meal.
A nonprofit organization can have clients, can offer products and services, will need revenue, should market itself, and must be concerned about customer satisfaction whether in those assisted or those who contribute donations in support of operations, programs or services. It is a business that must serve the public interest and it will succeed or fail as any business will, depending on how well it is operated.
Advantages of Non-Profit
Nonprofit corporations that qualify for 501(c)(3) status enjoy the following advantages:
- Personal asset protection and limited liability for directors, officers, and members
- Tax Exemption from federal income tax as a charitable organization
- Grant eligibility to receive private and public grants
- Donors can make tax-deductible donations
- Perpetual existence, even if a director leaves the business or passes away
- Possible exemptions from property taxes
- Application for special postage rates at a reduced cost
Starting a nonprofit organization and applying for tax exemption with the Internal Revenue Service is a lengthy process. Upon approval of the tax exempt status, there is ongoing reporting compliance and tax filing obligations every year in order to maintain the tax exempt status.
Compliance Requirements
Independent audits are mandatory for some nonprofits. The IRS does not require nonprofits to obtain audits, but other government agencies do. For example, the federal Office of Management and Budget (OMB) requires any nonprofit that spends $750,000 or more in federal funds in a year (whether directly or by passing the money on to other nonprofits) to obtain what is termed a “single audit” to test for compliance with federal grants management standards. In addition, approximately one-third of all states require nonprofits of a certain annual revenue size to be audited if they solicit funds from their state’s residents. The revenue thresholds vary from state to state. California requires annual audits for nonprofits registered with the state that have gross income of $2 million or more. Other states have lower income thresholds. Finally, some funders, such as foundations, will not provide funding to a nonprofit unless they receive audited financial statements. The same holds true for many banks and other potential lenders.
There are two cheaper alternatives to a full-blown independent audit. The first is called a review, which is like a mini-audit. A CPA examines your financial records, but much less thoroughly than in a full-blown audit. Unlike an audit, the CPA does not express an opinion as to whether your financial statements are in accordance with GAAP. Instead, the accountant merely states whether he or she is aware of any material modifications that should be made to the financial statements for them to be in conformity with GAAP. A review costs about half as much as an audit. Many funders will accept a review instead of an audit, but a review is not an audit and it may not be referred to as such.
The cheapest alternative to an audit is a compilation. This is where an accountant assembles your financial statements from the information you provide. The accountant does not subject your financial records to any audit or review and thus can express no opinion at all as to whether they comply with GAAP.
State Requirements
A few states have laws that require nonprofits that receive a certain level of state funding to submit independent audits to the state agency that provided the funding or to other state agencies. If your nonprofit receives any government funds --state or federal -- it is always a good idea to determine whether there is an accompanying audit requirement. State laws regulating independent audits are different state-by-state.
Massachusetts
Statute and Description: Mass. Gen. Laws ch. 12, § 8F | A public charity with gross annual support and revenue over $500,000 must file an audited financial statement prepared by an independent CPA together with its annual report. A public charity with gross annual support and revenue less than $500,000 and more than $200,000 must file a financial statement that is either reviewed or audited by an independent CPA.
Applying for federal tax exemption is a lengthy process. We are experienced for applying for federal tax exemption status.