What is a not-for-profit organization? Legally, a not-for-profit organization (or nonprofit organization) is a business that does not seek a profit. Not-for-profit organizations generate their revenues primarily through fund-raising and donations. After paying normal operating expenses—such as salaries, rent, and purchases of inventory, supplies, materials, and equipment—a not-for-profit organization uses the remaining revenue for the business’s declared cause and mission rather than paying stockholders. Not-for-profit organizations must apply for tax-exempt status with the federal government and sometimes with the states in which they operate. To maintain their tax-exempt status, not-for-profit organizations must demonstrate that a substantial portion of their income or revenue is spent on services to achieve their goals.

Can not-for-profit organizations act like corporations? Not-for-profit organizations are incorporated and, as such, are subject to most of the laws that govern for-profit corporations. Not-for-profit organizations receive limited liability protection when they become incorporated and are established as a separate legal entity. Similar to a for-profit corporation, a not-for-profit is required to hold board meetings and keep complete books and records. Not-for-profit organizations do not issue shares of stock, and their members (or owners) may not receive personal financial benefit from the organization’s profits (other than salary as an employee). However, some not-for-profit organizations do provide employee benefits, such as health insurance. In addition, should the not-for-profit organization dissolve, the organization’s assets must go to another not-for-profit organization with a similar mission.

Are there advantages to being tax exempt? An organization that has met the qualifications in section 501(c)(3) of the IRS code is considered a not-for-profit. It is therefore exempt from paying most federal and/or state corporate income taxes. It may also be exempt from state sales and property taxes. Not-for-profit organizations are also able to apply for grants and other public or private distributions and get discounts on postal rates and other services. People who donate to not-for-profits can deduct their donations on their tax returns. This encourages people to contribute to not-for-profits.

What structure would be best for groups of businesses with common goals? A cooperative is a business not owned by investors but rather governed by members who use or benefit from the products or services provided by the organization. The members of a cooperative have common interests and needs and can be individuals, such as individual farmers in an agricultural cooperative, or businesses, such as individual hardware stores, florists, or hotels that come together to form it. For example, Florida’s Natural Growers is a cooperative of citrus growers who own their own groves in Florida.

How are cooperatives structured? Members are the most important part of a cooperative. They buy shares to help finance the cooperative, elect directors to manage the cooperative, and create and amend the bylaws that govern the cooperative. Cooperatives depend on their members to volunteer for projects supported by the cooperative and serve on boards and committees. The board of directors in a cooperative appoints committees for specific purposes, such as member relations and special audits. The board of directors also hires the cooperative manager who handles the daily affairs.

Are cooperatives not-for-profits? Although their members may be motivated by profits, the cooperatives themselves are not. Any profits made by a cooperative are reinvested in the organization to continue to maintain it and improve its functioning. Or, the profits are returned to members in proportion to their use of the cooperative, not their investment or their ownership share.

Cooperatives are incorporated under state co-op statutes as businesses organized to serve their members. The status of a cooperative is also recognized by state and federal tax codes. Consequently, any distributed profits to its member-owners are taxed at the owner’s level.

What are the advantages of cooperatives? Cooperatives form because a group of individuals or businesses become dissatisfied with how the marketplace is providing the goods or services they need, the prices at which they are being sold, or their quality. By uniting, the members have more bargaining power to negotiate within the marketplace and enjoy reduced costs.