Benefits and Drawbacks of Nonprofit, Tax-exempt Status

ISI Sonoma view of mustard field

1. Unlike for-profits, tax-exempt 501 (c) (3) organizations pay no federal, state, & local taxes.

2. Having no ‘tax liability’ means that the nonprofit organization can devote larger proportions of their resources to achieving their goals. For-profits must pay taxes, reducing available resources.

3. Nonprofits qualify for special grants and government funding. For-profits do not qualify for foundation and corporate grants and rarely qualify for government funding.

4. Nonprofits meet ‘special rate’ qualifications for many government services, including discounted rates on bulk mail postage. For-profits do not.

5. Donors prefer contributions to these groups because they can deduct the payments from their own taxes. For-profits cannot receive tax-deductible donations.

6. Nonprofits exist as corporations and possess all the same benefits of corporate status as for-profits. The corporate form shields owners and managers of the organization from personal liability for the group’s actions, subject to certain legal exceptions.

7. Nonprofit incorporation formalizes the group’s goals and helps maintain organizational focus as the effort grows. For-profits are organized to make a profit and to benefit shareholders.

8. Nonprofits cannot divide profits among members beyond payment of reasonable salaries.

9. Nonprofits have restrictions on the use of assets and must use them for charitable purposes to justify their tax-exempt status. For-profits can use their assets in any manner consistent with maximizing value to shareholder.

10. For-profits have more flexibility and potential to achieve personal gain. Nonprofits have more flexibility and potential to achieve benefits to clients, communities and society.

11. In a nonprofit, personal control by a single member is limited, and the nonprofit is required to have a minimum of three Board of Directors. In turn, Board of Director members are the only people allowed to elect or appoint the officers who determine policy. For-profits have no restrictions on the number of board members and who controls policy.

12. A nonprofit organization is subject to more controls, laws and regulations than a for-profit. Nonprofits typically have more specifically defined articles of incorporation and more restrictive bylaws than a for-profit.

13. A nonprofit is dedicated to the public interest; therefore, its finances are more transparent, and open to public inspection. The public may obtain copies of a nonprofit organization’s state and federal filings and learn about salaries and other expenditure. Publically traded for-profit corporations also have their finances open to inspection, although in a less transparent form, and if privately held, the finances are not transparent at all.

Leave a Comment

Your email address will not be published. Required fields are marked *