Starting and Managing a Nonprofit Organization: A Legal Guide

By Bruce R. Hopkins | Go to book overview

CHAPTER THREE
Debunking Some Myths
and Misperceptions

Those who manage and consult with nonprofit organizations all too frequently misunderstand the nature of the entities they are working with and the law that applies to them. This chapter is offered with the hope that it will, at least for the readers, put an end to these myths and misunderstandings.


MYTH 1: NONPROFIT AND NOT-FOR-PROFIT ARE THE SAME

Nonprofit is the proper term. Many laws and lawyers (and others) use the term not-forprofitwhen they mean nonprofit. Accountants, for example, tend to prefer the term not-for-profit. This is understandable, because of the confusion surrounding what the term nonprofit means (see Myth 2). The term not-for-profit is properly used to refer to an activity that is engaged in without a profit motive (that is, a hobby), where the expenses involved do not qualify for the business expense deduction. This term was not intended (at least not in tax law parlance) to describe a type of organization. (See Chapter 1.)


MYTH 2: NONPROFIT ORGANIZATIONS CANNOT
EARN A PROFIT

Nothing could be further from the truth. A nonprofit organization can enjoy a profit (more income than expenses); no organization can operate in the red for very long. The difference between nonprofit and for-profit organizations lies in what should be done with the profit. Nonprofit organizations use profits to advance their programs. For-profit organizations distribute their profits to their owners; in a for-profit corporation, dividends are paid to stockholders. This is why the fundamental legal distinction between the two types of entities is the doctrine of private inurement. (See Chapters 1 and 5.)


MYTH 3: AN ORGANIZATION MUST BE INCORPORATED
TO BE TAX-EXEMPT

In general, this is not the law. As discussed in Chapter 2, a tax-exempt organization generally may take one of three forms. Incorporation may be (and usually is) desirable, but generally it is not mandatory. The federal tax law, however, occasionally

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