The Nature of Nonprofit Organizations

Nonprofits can be organizations that serve the public at-large or more specifically provide benefit exclusively to their members. Thus, state statutory provisions have been tailored by their respective legislators to provide distinct requirements for the different types of nonprofit organizations. As many states have adopted all or at least parts of the 1987 Revised Nonprofit Corporation Act, statutory law by way of the Revised Act provides nonprofit classification for mutual benefit and public benefit organizations.

More specifically regarding the tax-exempt status given to nonprofit organizations, the Internal Revenue Code § 501(c) provides the different categories of nonprofits based on their working purpose. For example, charitable organizations - having a purpose in providing some sort of charity - are one of eight categorized exempt purposes under I.R.C. § 501(c)(3).

Nonetheless, one of the underlying characteristic features of a nonprofit organization is the abstinence of distributing any part of its income to its officers, directors or members. Much of the statutory law on nonprofit organizations defines a nonprofit to be one that has “no part of the [its] income [be] distributable to a member, director, or officer of the corporation.” There is a general misconception when it comes to nonprofit organizations in regards to this whole notion of “profit.”

It’s not that the organization cannot make a profit per se, rather the organizations is disallowed from distributing any profits to its officers, directors or members. Some states actually provide specifically that nonprofit organizations are allowed to make profit, such as the state of New York. Under New York law, nonprofit organizations are fine to make “incidental profit” within their lawful activities. Still, it’s also emphasized here that such profits must not be distributed or divided between the directors and officers of the organization; rather, the profits the organizations make must be used to for the organization and its growth.

So long as profits are used for the operations, expansion and simply the maintenance of the organization lawful activities it is legitimate and the organization faces no problem in the regard of profits for its nonprofit status.

Jalal Moughania, Esq.