Nonprofit corporations differ from profit-making organizations in that nonprofits are not operated to personally benefit an individual nor can their money be distributed to stockholders. A nonprofit organization must devote all of its money to the organization’s designated purpose. This does not mean that nonprofits cannot pay salaries. However, salaries are reviewed regularly and cannot not be excessive. In addition, nonprofits differ from profit-making organizations in their purposes, tax status, political involvement and governance.
Whereas the profit-making organization is driven to make money for the company’s owners, the nonprofit organization’s sole purpose for existence is to fulfill its mission. Nonprofit organizations apply to the IRS and show bylaws that demonstrate that they fit into one of the categories that the government deems worth of receiving 501(c)( 3) tax-exempt status. Most 501(c)(3) tax-exempt organizations fall into the categories of educational, charitable, scientific, literary or religious. Examples include soup kitchens and charitable foundations.
Organizations that are granted tax-exempt status are not required to pay taxes at all with the exception of payroll tax for employees. However, not all nonprofits are tax-exempt. The Maine Association of Non-Profits notes that donations to some social service organizations such as the National Rifle Association or the National Organization of Women, which are categorized by the IRS as 501(c)(4), are not tax deductible.
Nonprofits classified as 501(c)(3) are very restricted in their political activities. They cannot participate at all in campaigns for or against candidates for elective office. However, they may offer education programs and information about issues and may otherwise engage in nonpartisan activities such as urging people to register and vote. They may lobby on issues, but lobbying cannot be a substantial part of the organization’s activities. A 501(c)(4) organization has more leeway to participate in lobbying and political campaigns.
A board of directors governs nonprofits. This board has the responsibility of making sure that the organization remains true to its mission as stated in the bylaws. Nonprofits that stray from their stated purpose or violate other relevant regulations can have their tax-exempt status withdrawn. In profit-making organizations, the owners are free to decide to run the corporation in any way they deem desirable. The owner may be a single individual or a few founders in a privately held company. With large publicly held companies, the stockholders vote at annual meetings to determine the direction the company should take.