What is a Not-For-Profit Organization?

A business run for profit is an organization that provides goods and/or services. It is typically privately owned and created with the intent of earning a profit that will allow for growing the business and enriching the owners. A not-for-profit organization, or non-profit organization (NPO), is a concept in multiple countries. While the main overarching criteria is that the organization not be organized or operated in a way that profits or benefits private interests, there are some distinctions in the laws defining not-for-profit organizations in various places. This shows that it is critical for an incipient organization to have a firm grasp of the laws governing not-for-profit organization’s operation in any jurisdiction in which it hopes to be recognized.

In the United States, a not-for-profit organization is one that was organized for exempt purposes under section 501(c)(3) of the Internal Revenue Code. Exempt purposes are educational, charitable, religious, scientific, literary, encouraging national or international competition of amateur sports enthusiasts, performing public safety testing, or working to prevent cruelty to children or animals. Churches and religious organizations and political organizations are examples of not-for-profit organizations, but veterans’ organizations, social clubs, fraternal organizations, employee benefits associations, agricultural and labor associations, and social welfare organizations are also included. Speaking colloquially, all of these different types of organizations are sometimes referred to as charitable organizations. Not-for-profit organizations in the United States are restricted in the extent to which they can engage in political and legislative lobbying, and they are tax-exempt.

In Canadian law, a not-for-profit organization, also referred to as a non-profit organization, is defined in the Income Tax Act sub-section 149(1)(l). Unlike the not-for-profit organization in the United States, in Canada, there is a sharp distinction between a charitable organization and a non-profit organization. Though both types of organization are tax-exempt, charitable status is achieved by application and registration, while non-profit status is achieved by meeting four criteria. The four criteria for a non-profit in Canada are: must not be a charity; must be organized entirely for the purpose of civic improvement, social welfare, pleasure, recreation, or any alternative purpose that does not involve profit; must be operated for the purpose for which it was organized or other qualifying purposes; and cannot use any of its income for the benefit of any member, shareholder, or participant in the business, with the sole exception of Canadian amateur athletes.