A nonprofit organization is an organization that, pursuant to Section 501(c) of the United States Internal Revenue Code, does not retain its surplus revenue as profit. Instead, any surplus money is used to sustain the organization in its execution of a specific goal or set of goals, as designated by its bylaws and charter. In contrast to for-profit organizations, NPOs are largely project-driven ventures as opposed to product-driven ventures.
Before applying to be a 501(c) organization, a board of trustees must be assembled. The board will be committed to governing the execution of the organization’s goals. Once assembled, the board is responsible for drafting a clear and precise set of bylaws outlining the organization’s goals and the ways in which those goals will be pursued.
The bylaws must be recorded and, along with some necessary accounting paperwork (which varies according to different concessions granted by Section 501(c)), submitted to the IRS and the department of the secretary of state where the organization plans to operate in.
Once this paperwork is filed with the state, it may take up to a year for an organization to get approved as a 501(c). Most NPOs use this interim to prepare for launch immediately upon receipt of approval. Much of this time is spent identifying and communicating with potential donors, writing grants and taking other measures to secure funds for when the organization is approved.
Following state approval, a 501(c) organization must adhere to the bylaws it established in order to maintain its tax-exempt status. Its operation is limited by the bylaws it imposed on itself, and its tax-exempt status is contingent upon adherence to those bylaws. If an organization is not working effectively to accomplish its outlined mission, its tax-exemption will be revoked.
Under 501(c) of the Internal Revenue Code, an NPO may receive one of 29 different designations according to its mission. These designations determine what kind of tax exemptions the NPO will receive, as well as the kind of economic activity it is permitted to engage in. These designations are determined by an organization’s goals, the parties it engages with economically, and the recipients of any aid the organization is providing.
Most NPOs involved in the fight against poverty are designated as 501(c)(3)s. By law, a 501(c)(3) falls under one of the following categories: religious, scientific, charitable, educational, literary, public safety, the fostering of international or national amateur sports or the prevention of cruelty to children and animals. Organizations that actively fight against poverty can fall under any number of these categories. As well as tax-exemption, 501(c)(3)s receive reduced postage rates, and are permitted to generate receipts to provide donors with tax write-offs. They are, however, prohibited from participating in any political campaigns.
For an NPO engaged in the campaign against poverty, transparency is of utmost importance. Strict adherence to bylaws and charter are necessary. If the secretary of state perceives that an organization is straying from its mission, its tax-exempt status will be lost. This renders the organization far less effective in the abolition of poverty. Not only does this cost an organization financially, it costs the world’s poor.
– Matt Berg
Sources: 501c3, Cornell Law, IRS, IRS