For starters, what is a non-profit business?
If a company is classified as a 501(c)(3), how does it make capital?
What if the not-for-profit business suddenly stops receiving revenue from donors/grants?
NPO’s have what we refer to as an ‘operating reserve‘, which in simple terms, is an emergency savings that has no restricted fund/assets that the company may use in time of dire need (i.e. loss of revenue, increase in expenses, delayed payments, etc.). There is no legal limit as to how much can be saved. Fun fact: Harvard University has $34 billion tucked away in their operating reserve.
NPO Income and Net Earnings for the Year
What do non-profits present each year to the government?
What is done with the surplus?
kept for dividends (paying dividends to shareholders at a later date)
reinvested back into the organization. (During this, the money can be used to fund operational costs, funding an expansion, compensation, and benefit for the founders/management and staff)
Expenses Made by NPO’s
Knowing all this, do all NPO’s classify as a 501(c)(3) of the IRS code?
Short answer, no. Some non-profit businesses are actually granted by the state, meaning the regulatory laws must be followed as what the state implies. These are written as 501(c). They may not allow the donors/charities to write off donations.
501(c)(3) is considered to be a charity, thus allowing donors to make charitable donations which are tax-deductible.
501(c)(6) is a non-taxable, meaning is has no liability to make a compulsory payment for income earned (briefly put – the organization does not pay taxes to the government), but donors do not receive a tax deception for making a donation.