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What are the advantages and

disadvantages for nonprofit,

tax-exempt status?
What are nonprofit organizations?

Nonprofit organizations are trusts, corporations or

associations that have been organized for a charitable
purpose and can qualify for tax-exempt status from the
federal government. These organizations are also referred to
as 501(c)(4) organizations, because they qualify for
tax-exempt status under section 501(c)(4) of the Internal
Revenue Code.

What are the advantages of nonprofit organizations?

The main advantage of tax-exempt status for nonprofit

organizations is obviously that they do not have to pay
federal taxes on their net income. In that way, the earnings
can be cycled back into the organization to improve it.
Contributors to nonprofit corporations also receive a benefit:
their contributions are tax deductible. Therefore, many
contributors use donations to 501(c)(4) organizations to
manage their tax burden, to the benefit of the organization's

What are the restrictions on nonprofit organizations?

Of course, these advantages come with certain restrictions on
the activities of a nonprofit organization. To obtain a
501(c)(4) exemption, the organization must be devoted to
charitable, religious, educational, scientific or literary
pursuits or be organized to test for public safety, foster
national or international amateur sports or prevent cruelty
to children or animals. Charitable has been further defined to
include relief for disadvantaged or underprivileged persons,
advancing religion, education or science, preservation of
monuments and public spaces, elimination of discrimination,
advancement of human and civil rights and promoting a
healthy community.

Despite these restrictions, nonprofit organizations are

prohibited from political campaigning or lobbying. Activities
of this sort endanger the organization's 501(c)(4) status.
Common examples of this restriction occur when religious
leaders are cautioned on engaging in political endorsements
from the pulpit or when an aid organization is prohibited
from lobbying as a substantial part of its activities.

Nonprofit organizations must also maintain their nonprofit

status: No shareholder or individual can receive net profits
from the organization, and there can be no benefit to private
interests, such as the creator's family.

Nonprofit organizations do not escape other typical

corporate obligations by virtue of their tax-exempt status. As
employers, nonprofit organizations are responsible for all
employer obligations such as obtaining an Employer
Identification Number (EIN) from the IRS and withholding all
applicable taxes from employee paychecks. Nonprofit
organizations are also required to report gross receipts to the
IRS on an annual basis, unless gross receipts total less than
$25,000. To obtain tax-exempt status, organizations must
report three years of past financial history, or three years of
projected budgets if in existence for fewer than three years.

How can an individual determine the tax-exempt status of a nonprofit


The Internal Revenue Service can revoke the tax-exempt

status of a nonprofit organization that no longer qualifies for
the status under section 170(c)(2) of the Internal Revenue
Code. The IRS maintains a list of organizations that no longer
qualify for tax-exempt status in Publication 78. Recent
revocations may appear on the IRS Web site or in the
Internal Revenue Bulletin (IRB).

If an individual wishes to make a tax-deductible contribution

to an organization but questions the organization's status, he
or she can check the IRB or Publication 78 before making the
donation. The IRS may not allow tax deductions for
donations made after the date that the revocation is
announced in the IRB (unless the nonprofit organization
appeals the revocation and a final determination on the
appeal has not been made).
. Small Business
. Business Models & Organizational Structure
. Advantages of Organizational Structure

Advantages & Disadvantages of Nonprofits

by Ruth Mayhew

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Nonprofit organizations have many purposes and functions in society and they serve
the needs and interests of millions of people in the United States and abroad. However,
nonprofits aren't without their disadvantages, stemming from funding issues to social
pressure. Despite the challenges, nonprofits survive through generous donations of
money and in-kind donations from benefactors and supporters.

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Advantage: Employee Commitment

Many employees who work for nonprofits have a personal interest in and commitment
to the organization's cause. For example, a woman whose relative or close friend fought
breast cancer may look for a career opportunity with the nonprofit Susan G. Komen
foundation. A parent whose child is active in scouting may enjoy a staff position with
the Boy Scouts of America. There is an advantage to employing workers who believe in
the nonprofit's mission, values and philosophy. In addition, employees with a personal
interest may have a better understanding of the structure and processes of a nonprofit

Disadvantage: Limited Funding

Fund development and fund-raising can be a nonprofit organization's greatest

challenge, particularly during an economic downturn and when unemployment rates
are high. In fact, some nonprofits are forced to discontinue services to populations in
need when the nonprofit itself lacks funding. Fund development also requires a
competent grant writer with a relatively high success rate. Hiring the services of a
grant writer can be costly and turn the fund development hurdle into an essential

Advantage: Intrinsic Rewards

The services that nonprofit organizations provide benefit communities and segments of
the population that are often overlooked or underserved, such as homeless children.
Research conducted by The National Center on Family Homelessness indicates that
more than 1.5 million children in the U.S. were homeless in 2005, and the number is
expected to rise dramatically due to the effects of a recession. It's impossible to measure
the tangible effects a nonprofit organization can have on families, but the intangible
benefits far outweigh the dollar value of their services. Nonprofits and their employees
reap intrinsic rewards from the satisfaction of helping clients and community members
who are not in a position to fend for themselves. This is a distinct advantage for
nonprofits and the people associated with nonprofit organizations.

Disadvantage: Social Pressure

Potential backlash and social fracas plague some nonprofit organizations whose
missions are considered extreme, whether they are based on fundamentalist beliefs or
progressive attitudes. For example, religious-focused nonprofits whose actions incite
emotional response to the privacy of fallen soldiers and their families receive social
pressure to cease activities. Progressive organizations who goal is enlighten communities
and expand the concept of diversity through redefining family structure also encounter
protests and opposition to their causes and philosophy.

Advantages of starting a non-profit organization

Most of the income of a non-profit is exempt from income taxes.

The contribution from a donor is also tax exempt in most of the cases.
A non profit organization can receive grants or aid in contrast to
business entities that have to use loans as a means of raising funds.
The satisfaction at being able to contribute to social development is
Disadvantages of starting a non-profit organization

Non-profit organizations are subject to stricter reporting requirements.

Benefits arising out of the nonprofit organization cannot be inured for
the personal benefit of its members, directors, officers beyond a
permissible limit.
Getting grants is a tedious job.
In case, the incorporators decide to move onto some other pursuits in
life, they cannot take along the assets accumulated by the non profit