Week 2 – What is a nonprofit?

What is a nonprofit?

Good question!  And, as with many things, the answer is not necessarily that simple.  You see, it depends on the context: state law, federal law, and accounting standards. 

The point of this lesson is to understand every context as it relates to any individual entity.  Let me explain.

First, let’s consider state law.  Every state has a law that governs the activities of nonprofits in that state.  Chapter 617, Florida Statutes, contains the Florida Not For Profit Corporation Act.

Next, let’s talk about the IRS.  The IRS doesn’t really address nonprofits.  “Tax exempt organization” is the term used in the Internal Revenue Code and related regulations.  And that makes sense, right?  The IRS is about collecting taxes.  And it is the IRS that makes the determination whether an entity is exempt from taxes or not.

Finally, let’s talk about accounting standards.  The great gods of accounting have defined a not-for-profit entity to be an entity that possesses the following characteristics, in varying degrees

·         Significant resources from contributions.

·         Operating purposes other than for profit

·         Absence of ownership interests.

These characteristics distinguish a not-for-profit from a business entity.

Here’s where it gets fun.  An entity can be a nonprofit corporation according to state law, but may not have qualified for tax exempt status according to the IRS.  And, an organization may be tax exempt according to the IRS, but may not be accounted for as a nonprofit according to the great gods of accounting.

As I said earlier, the point of this lesson is to understand each entity from the perspective of state law, federal law, and accounting standards.

Practically speaking, most of our clients are not-for-corporations according the laws of their home state, exempt from income taxes according to the IRS, and are accounted for as not-for-profit organizations according to the great gods of accounting.