20 Non Profit Organizations Advantages and Disadvantages

In the United States, there is one defining factor between a non-profit company and a for-profit company. It is based on IRS tax code 501(c), which excuses the non-profit company from any federal tax liability. In exchange for the advantageous tax structure, they are required to distribute any surplus earnings they make to qualifying social causes.

More than 1.5 million non-profit organizations exist in the United States, with many more operating around the world. They are private foundations, public charities, and NGOs, just to name a few.

There are certain advantages and disadvantages to consider when looking at the structure of a non-profit organization that go beyond tax exemption. Here is a look at the key points to consider.

List of the Advantages of a Non-Profit Organization

1. The tax status may extend to the state level as well.

A non-profit organization qualifies for a favored tax status at the national level. Most states will extend this protection at the local and state level for tax laws as well. Because of this structure, donations made to the organization may reduce personal tax liabilities. Although tax laws do change, there are potential deductions available for donations to a qualified organization if they are large enough.

2. The founders are kept separate from the organization.

The structure of a non-profit organization is very similar to that of an LLC. The individual founders of the company are kept separate from the business structure, which means their personal assets face little risk in the case of a lawsuit, fine, debt, or similar legal matter. There is an advantage here in the fact that board members and employees of a non-profit organization receive similar protections. The only issue that pierces this shield is if the individual in question acts unethically or illegally.

3. It holds a legal status that remains intact.

Like a corporation, the status of a non-profit remains legally intact, even if the founders of the company are no longer associated with it. That makes it possible to create a mission-driven company that can perform good works and distribute profits in a meaningful way at the local level. It gives people a chance to earn a fair living while doing something that offers a positive impact on the lives of others.

4. There is eligibility for private and public grants.

Foundations, families, and government agencies usually limit the grants they make available each year to non-profit organizations. Although there may be extensive documentation involved during the application process, a grant can help founders with limited funds begin to scale their agency, so that it can help more people.

5. The 501(c) structure is not the only option available.

Non-profit organizations can be informal in the United States. If there is a group of people in your community who wants to get together periodically to help others, then do it. Community clean-up patrols, support groups, book clubs, and other associations that only bring in a few dollars each year or manage small sums of money don’t even fall under the supervision of the IRS. If there’s something you think your community needs, then get some people together and just do it.

6. It allows you to do something good.

For some, the idea of working in a for-profit business means they’re just earning a paycheck. Founding a non-profit organization gives them a chance to feel like they are contribution to a solution for a problem that exists. It allows people to feel like they’re working to improve society in some way with what they are doing. After all, if you change the world for just one person, you’ve still changed the world.

7. It may qualify for certain employee benefits.

When a non-profit organization hires enough employees, many benefits agencies will provide group discounts for items like life insurance or health insurance. Although the pay levels at a non-profit tend to be lower than they would be in the private sector, the discounts on health insurance may help to offset some of these losses. Many non-profits offer extensive vacation time awards and extra sick days to compensate for lower salaries as well.

8. The employees of a non-profit organization are often highly motivated.

There is a lot of satisfaction to be found when working for a non-profit agency. Although the paychecks may not always be great, there are a lot of intrinsic rewards that can be found in this line of work. For many, there is a better work/life balance that happens when employed by a non-profit. This allows you to recruit people who want to make a difference in the world, who share the same vision that you share, which creates high levels of motivation.

List of the Disadvantages of a Non-Profit Organization

1. There are limited fundraising options available for investors.

In the world of non-profit organizations, you are raising funds through the collection of donations. You’re asking people to give you cash or assets out of the goodness of their heart. And, truth be told, not everyone wants to do that. There is no leeway to ask for investments that turn a profit for investors in the U.S. with this business structure. That means most agencies require a large sum of money, right at the start, from a foundation or family, and that isn’t always easy to find.

2. There are added administrative costs to consider.

Because a non-profit organization is kept in a special tax category, there is an extra level of paperwork that must be completed for this structure to be approved. The organization must apply at the federal level and the state level for this protection in most jurisdictions. Some counties or cities may require a third application to be filed. You must meet the public reporting requirements as well. All of this adds up to more fees, more legal requirements, and more accounting headaches.

3. A non-profit can lose their tax status.

The deadlines for paperwork are very strict within the world of non-profit organizations. If an organization misses their annual reporting deadline, then they may not be allowed to continue qualifying for their tax-exempt status. Even the statements themselves must meet specific requirements to qualify as an authorized filing.

4. People are often critical of non-profit decision-making.

The financial statements which are released by a non-profit organization become part of the public domain. That means anyone is permitted to review the statements and offer their opinion on it. Because of today’s Internet saturation rates, anyone can publish criticisms of an organization that may go viral, affecting the ability of the agency to do fundraising in the future. One common complaint that non-profits hear a lot involves employee pay.

5. The founders of a non-profit organization face an ever-decreasing role.

As a non-profit organization begins to grow, the people who helped to organize the agency will typically see a role that decreases. Many people start non-profit agencies because they actively want to help people. What they don’t want to be doing is a big pile of paperwork as they sit in an office all day. This causes decisions to be delegated to directors and the formation of a shared control structure. Some founders even choose to walk away.

6. Non-profit organizations are not the same as tax-exempt organizations.

The non-profit designation is an indication that the agency is exempt from certain types of liability. To be tax-exempt, the agency must fit into a specific status category that is published by the IRS. In total, there are 20+ categories that fall under the 501(c) tax code, including charitable organizations, social welfare, labor unions, farm bureaus, business leagues, and social clubs.

7. There may be a lot of competition for funding.

Non-profit organizations rely on grants, donations, and authorized investments to fund their activities. With over 1.5 million agencies competing for these resources in the United States alone, there is no guarantee that you’ll receive the funding that you want. The competition is very tough, which means you must have a formal business plan, vision, and mission to follow if you’re going to get noticed.

8. You are not permitted to take organizational assets with you.

When you begin a non-profit organization, any assets that are accumulated by the company, or put into the company by you, are not permitted to leave when you leave. At best, you’re permitted to draw a salary from the agency for the work that you do. Anything beyond that, the growth of the company stays in the company because of its legacy status. If you’re trying to build your own portfolio, this is not the structure that will help to make that happen.

9. Salaries are still subject to income tax.

Just because your agency may qualify for tax-exempt status doesn’t mean that your workers get to stop paying taxes. You’re still required to make the withholding that is required for income-based taxes in the United States. All salaries are subject to income tax, just like any other type of compensation. You’ll also find that the complexity of these financial statements and withholding needs becomes more complex as the amount of revenues you generate begins to increase.

10. It must be founded for the general good of society.

A non-profit organization cannot be founded to benefit a specific person. You must create a non-profit organization to benefit a specific group of people. Many agencies help someone suffering from a specific ailment or condition. You might start a non-profit to provide specific services to a community that are needed. What you cannot do is start a non-profit agency that pads your wallet with the assets it works to accumulate.

11. The board members of a non-profit agency are usually volunteers.

A non-profit agency is required to have a Board of Directors. Most board members are unpaid volunteers, working to steer the company in the direction it should go. Because they are volunteers, it can be difficult for some agencies to recruit enough experienced people who want to have a role in how the company operates. Those who do decide to serve may only stick around for a year or two, which can make it difficult to find consistency.

12. The 501(c)(3) status prevents political campaigning or lobbying.

In the United States, being awarded this tax-exempt status comes with a specific requirement about political campaigning and lobbying. You’re not allowed to do it if a substantial part of your activities is to influence legislation. Some lobbying is permitted, but “too much” risks a loss of the tax-exempt status. How much is “too much” is not defined. Agencies can also involve themselves in public policy issues without the activities being considered as lobbying by the federal government.

The advantages and disadvantages of a non-profit organization are based on the idea that your business idea is one that can help provide a general good to your local community. If you want your business to make money, this is not the formal business structure to use. There are still challenges to face here, especially from an administrative standpoint, but at the end of the day, these companies do a lot of good things to make the world a better place.