FAQs About Nonprofits in General
Below are answers to frequently-asked questions about nonprofit organizations in general. For more detailed information and resources related to specific nonprofit management topics, please check out our Nonprofit Staff Rooms.
- What is the difference between a nonprofit organization and a for-profit organization?
- Who owns a nonprofit organization?
- What questions should I ask about a nonprofit before I contribute to it?
- Where can I find resources to help me do my job better?
- Have a question?
The most critical difference between a for-profit and a nonprofit is that a nonprofit does not distribute its assets to shareholders. Its assets are owned by the community and therefore must be returned to the community in the form of public benefit -- that is, in educational, scientific, religious or charitable activities. If a nonprofit goes out of business, its assets must be distributed to other nonprofit organizations.
Another major difference is that nonprofit 501(c)(3) organizations (those we typically understand as "charitable organizations") are exempt from paying most income taxes. A lot of people are also aware that many for-profit businesses pay their board members, whereas most nonprofits do not; nonprofit board members should not use their board positions for material gain (this is considered "private inurement"). Also, although nonprofits are increasingly earning a larger percentage of their income, they are traditionally understood to generate income through private contributions and public contracts.
At the same time, there are many similarities between a nonprofit and a for-profit organization. For example, both are subject to corporate labor law, both must meet GAAP standards in their accounting methods and both provide products and services to customers or clients. Both accrue the costs of running a business and employing people, and thus must generate income in order to pay for those costs.
The community in which it is located.
First, be aware that there is no foolproof formula that applies to every donor and every nonprofit. As a donor, you have a responsibility to figure out what is important to you in the organization receiving your donation -- and then to make sure your recipient meets your individual standards and criteria. You also have the right to ask questions about how the nonprofit generates and spends its money, governs and manages itself, and fulfills its mission. Much of this information can be found in the organization's Form 990, which can be found (for organizations with annual incomes over $25,000) on www.GuideStar.org. You also have the right to specify what type of activity you want your donation to cover -- or, alternately, to allow the organization to decide where your donation will best be spent.
There are a few watchdog groups that have set up standards by which they measure and "approve" individual nonprofit organizations, and you might find their guidelines helpful. Generally, they look at factors such as public disclosure of financial information, the type and distribution of expenses, board structure and participation, and the truthfulness of their reports. Two prominent ones that you might want to check out include the Better Business Bureau's Wise Giving Alliance and Charity Navigator. But be aware that these standards can only go so far in describing the worthiness of an organization to receive your donation. Ultimately, it is up to you to decide whether or not the nonprofit meets your personal standards.
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