5 Common Myths and Misconceptions About Nonprofits

There is a lot of misinformation out there about nonprofit organizations and the nonprofit sector in general. To help you separate fact from fiction and better understand how nonprofits operate, we have provided a list of five common myths and misconceptions that people often have regarding nonprofit businesses. If you have further questions or need further assistance, please do not hesitate to contact our law firm today to learn more!

Misconception # 1: Nonprofit = Tax Exempt

While it is true that a company must form as a nonprofit before it can achieve tax exempt status, being a nonprofit entity and being a tax exempt company is not the same thing. Nonprofits are formed in essentially the same manner as a for-profit corporation, and those that do not file or have not yet filed with the IRS for 501(c) status are taxed like any other business would be. Nonprofits are created at the state level and distinguished by the fact that they cannot distribute profits to private individuals. Being tax exempt means the company has become a 501(c) organization, which is not required to pay federal income taxes. There are 29 different categories of potential 501(c) organizations, such as 501(c)(3) companies which include nonprofits that are charitable, religious, educational, scientific, and more.

Misconception # 2: All nonprofits are charities

A nonprofit is simply a business entity that does not distribute profits. It is not necessarily a charity. The purpose of charities is to engage in some sort of relief operation to benefit society, which will always be the purpose of that charity. Nonprofits, on the other hand, can later choose to become for profit ventures. A notable example of this is the National Football League. Up until last year, the NFL operated as a nonprofit organization under the same IRS tax exemption as chambers of commerce (501[c][6]). As you probably know, the NFL is not an organization whose purpose is to conduct charitable activities.

Misconception # 3: Nonprofits do not make a profit

The term “nonprofit” is often a major source of confusion. People assume it means the company cannot or does not make profits. Nonprofits are absolutely allowed to engage in business that produces profits, but the profits cannot be distributed to private individuals. They must instead be used to pay company costs like overhead, salaries, etc, or they can be set aside to further improve or grow the company, commonly to contribute to community services the nonprofit provides at no or reduced cost.

Misconception # 4: Nonprofits are volunteer organizations

This misconception stems from the previously mentioned misconceptions that nonprofits are only charitable organizations and that they do not make money. Many nonprofits may utilize volunteers, but most of them are staffed by regular, paid employees.

Misconception # 5: Nonprofit legal strategies are the same as a for-profit business

Many who recognize that nonprofits are indeed business ventures are under the mistaken belief that they can approach a nonprofit’s legal foundation the same way they would approach the legal strategy of a for-profit business. There are certainly some similarities, but nonprofits are faced with unique legal challenges, particularly if they are interested in becoming tax exempt. They must adhere to strict regulations regarding things like business structure, and it can be difficult to stay compliant. It is important that you enlist the guidance of an attorney who understands the legal nuances inherent in founding and operating a nonprofit organization.

If you are interested in starting a nonprofit, or if your existing nonprofit needs skilled and effective legal guidance, please contact APH Law today!

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Written by APH Law PLLC

APH Law PLLC

When we founded APH Law PLLC in 2010, we did so out of a desire to connect business owners with more and better opportunities. No matter what industry you’re operating in, creating a strong foundation, preparing for the future, and protecting against challenges are key to long-term success. It is this kind of support that we take tremendous pride in helping businesses.