Basics of for-profit and non-profit organizations

Business owners and non-profit founders understand the general differences in their type of organizations. After all, one’s purpose is to make money and the other’s is to give it away in the form of service. Both should do their research and consult with tax and accounting professionals to understand the IRS rules and regulations, laws, and tax implications that apply specifically to them. Especially when it comes to staying compliant with operating in their localities.

For-profit companies register with the IRS, and state and local agencies when applicable, for filing returns and paying income taxes based on net income. Small businesses typically receive initial funding from their personal funds, bank loans, and/or investors and generate revenue based on sales of their products or services. Another primary aspect of for-profits is that the owner leads almost all aspects of the company and the resources are paid employees, and when needed, independent contractors.

Non-profits have their own set of characteristics. These organizations are considered tax-exempt by the IRS and usually the states where they serve, but may be responsible for property taxes. Non-profits may also be responsible for paying taxes if they conduct certain activities that could be categorized as a trade or that do not relate to furthering the exempt mission of the organization.

Initial funding for non-profits are private donations in the form of time or money, corporate sponsorships, government grants, and recently, crowdsourcing. A board of directors leads the organization’s direction where financial matters are involved, ensuring their focus stays on fulfilling their area of service. Resources for non-profits are not primarily paid employees, although a small staff is necessary. In additional to these paid employees, contractors and outsourcing fill in gaps for essential functions, and volunteers are the primary human resources.

The nuances of each type organization’s finance and accounting systems and tax strategy are best explained and maintained by licensed and experienced tax professionals.