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Home · Guides · Understanding Laws Pertaining to Non-Profit Organizations

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Understanding Laws Pertaining to Non-Profit Organizations

An NPO or a non-profit organization is one that does not directly distribute surplus income to its shareholders. Instead, an NPO uses the funds that it earns in order to fund a public purpose. For instance, an organization that works with homeless animals may be classified as a non-profit organization because it offers a public service in a sense and does not operate for the sole purpose of earning a profit.

These organizations qualify for tax exemptions if they meet certain government criteria. If you are thinking of turning your organization into an NPO, there are a few things that you will need to understand. Again, the main purpose of an NPO is not to earn a profit. It is to fulfill a specific goal and this goal could be related to many different things. While employees who work for a non-profit organization are typically paid, any left over money that the organization earns is cycled back into the corporation or organization and used to further help the organization to reach its goals. This goal is typically stated in the mission statement for the organization. The mission statement is essential and should clearly state the goal as well as detail the purpose for the organization’s creation.

In order for an organization to qualify to be tax exempt, it must fit into one of five different categories. These categories include educational, scientific, literary, charitable and religious. If the organization fits into one of these public purpose categories, it can enjoy exemption from certain taxes. You should understand that the purpose for the NPO has to be provable and tangible. This means that you have to be able to prove that you are operating on a not for profit basis and your purpose must be one that makes sense in general.

For instance, you cannot simply claim that you have a not for profit organization that is going to operate solely to study flying pigs. This is simply not feasible and in order to qualify for tax exempt status, your mission has to be feasible. A tax exempt organization is not required to pay federal taxes or state taxes on any activity that is related to operating that organization. For instance, if your organization rescues homeless animals then the food and other products you will need to care for those animals can be purchased without sales tax.

Organizations that qualify for tax exempt status do have to show that they are actively working toward their goal and this proof has to be documented. Even if you reach not for profit status however, you will still be required to pay taxes on any activity that is not directly related to your purpose. If you sell products or services for instance that are not related to your mission then you will be responsible for paying the taxes on those products or services.

The laws regarding tax exemption and not for profit status can be confusing. If you are considering a non-profit organization, you should speak with an attorney who has experience in this field. He or she can help you to better organize your business plan and ensure that you are operating your organization within the confines of the law.

09.02.2013. 16:31


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