Definition of not-for-profit business

Written by lynn lauren
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Definition of not-for-profit business
Businessman (Image by Flickr.com, courtesy of Ludovic Bertron)

A not-for-profit business, or a non-profit, is a type of business created to perform a charitable function. The goal of the business is to spend all of its proceeds on its mission and therefore, not to make a profit.

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Significance

A true non-profit entity in the United States functions as a 501(c)(3) organisation. Any donations or gifts given to the charity, where a benefit was not received by the individual, can be deducted from that individual's taxes in the next calendar year.

Function

A not-for-profit business functions to complete a specified mission. Churches and large charitable organisations, such as the March of Dimes and the American Cancer Society, are examples of not-for-profit entities. The March of Dimes operates to eradicate premature birth while the American Cancer Society operates to eradicate cancer.

Types

Some not-for-profit businesses function to provide a service, such as homeless shelters. Some function to provide education and information, such as some schools and after-school programs. Others non-profit businesses promote research and education to eradicate diseases or other issues through research and education.

Considerations

A not-for-profit business is run differently than a for-profit business. In non-profit businesses, at the end of the financial year, a majority of the income should be spent to cover expenses with a reserve fund in place (but most not-for-profit businesses do not have a reserve fund and deplete their resources in full each year). The goal of a for-profit business, however, is to have excess funds left over at the end of the year as part of a reserve fund in addition to profit for its shareholders.

Misconceptions

Many assume that not-for-profit businesses rely solely on monetary donations to survive. While this is true to some extent, many non-profit businesses have begun selling items or providing services in exchange for payment to help further their cause and lessen their dependence on donations.

Warning

Prior to making a donation to any not-for-profit business, do your research. Check to make sure that the business is a registered non-profit and that your donation will be tax deductible. In addition, request a Form 990 on the business to show a breakdown of where its funding is actually spent. This will help you decide if the not-for-profit business is running in accordance with your values.

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