What are the benefits and drawbacks of nonprofit, tax-exempt status?
Many organizations see only the financial benefits of nonprofit and tax-exempt status. Qualifying groups pay no tax on federal, state, and local taxes, and therefore can devote a larger proportion of their resources to achieving their particular goals. The status can also qualify groups for special grants or government funding, as well as special rates for services or even postage. Donors prefer contributions to these groups because they can deduct the payments from their own taxes.
The form of the organization offers advantages in itself. Since nonprofits exist as corporations, they possess all the benefits of corporate status. The corporate form shields owners and managers of the organization from personal liability for the group's actions, subject to certain legal exceptions. Nonprofit incorporation formalizes the group's goals and helps maintain organizational focus as the effort grows.
Despite these advantages, nonprofit and tax-exempt status should not be an automatic goal. Drawbacks to the status include:
- inability to divide profits among members beyond payment of reasonable salaries;
- limitations on the sources of the group's incomes; and
- restrictions on the use of assets to purposes justifying tax exemption.
Some organizations prefer the flexibility and potential for personal gain implicated by for-profit status. Other organizations eschew incorporation entirely. Many smaller organizations will not realize substantial advantages from nonprofit tax-exempt status after going through the intensive application process. Each individual group must weigh the pros and cons of the status carefully in light of their organizational goals and values.