Nonprofit organizations are often difficult to define because of the variety of organization types and services offered in the sector. At its core, a nonprofit is an organization that works to provide societal benefit and does not distribute profit to any private individuals. In this way, the nonprofit sector is often recognized as the “Third Sector,” as it supplements the public sector (government) and the private for-profit sector (business).
In the United States, the nonprofit sector is defined by the tax status of organizations that form the sector. In other countries, organizations in this sector may be alternatively known as non-governmental organizations (NGOs), civil society organizations (CSOs), or other derivatives of the like. The United States tax code is what brings us to refer to these organizations as nonprofit organizations.
The term nonprofit is not to be confused with a prohibition against earning a profit. Instead, the legality of a nonprofit requires that any profits be distributed to purposes the mission of the organization; profits may not be allocated to directors, officers, members, or anyone else who has understood “control” of the organization.
While people more easily recognize charitable organizations as nonprofits, there are a wide array of other types of organizations that are also nonprofits, according to the Internal Revenue Service (IRS) Code. Charitable organizations hold the most common IRS tax status – 501(c)(3). However, the IRS Code includes organizations with many other tax statuses, all of which are nonprofit organizations. The subsections that outline different types of organizations range from 501(c)(1) to 501(c)(27), as well as a few additional subsections within the IRS Code.
The tax code specifies which organizations qualify for certain federal tax exemptions, and each state has its own tax laws to allow for additional exemptions for nonprofit organizations. Nonprofit organizations are not required to register with the IRS unless they hope to obtain tax-exempt status. Thus, the IRS Business Master File, which identifies all tax-exempt organizations, is not the only listing of nonprofit organizations. Organizations may also incorporate as nonprofits in their state (i.e. with the Indiana Secretary of State) and are included in the state’s listing of nonprofits. Additionally, organizations may not incorporate with the state or register with the IRS (especially churches), so they cannot be found on either of these listings.
As made evident, there is no clear definition of what a nonprofit is. Instead, we base our understanding of the sector on our understood behavior of the organizations in the sector and the tax laws that define the rights of those organizations. For additional clarification of what types of organizations are included in the nonprofit sector, see the Major Nonprofit Fields of Activity [link this page] page.