Not-For-Profit Organizations

A Business Lawyer’s Perspective

While discussing the importance of donating to philanthropic efforts, Paul Newman once stated, “I respect generosity in people, and I respect it in companies too. I don’t look at it as philanthropy; I see it as an investment in the community.” Newman’s insight carries some wisdom we should consider. First, however, we need to consider the various types of not-for-profit organizations available in today’s market.

In today’s economy, investors have virtually unlimited options in determining where to invest their money. For the majority of investors, the most satisfying investments are generally with companies able to provide the highest rate of return. The quality of these investments can be measured in dollars and cents, and investors receive a direct monetary gain if their investments increase in value.

However, another type of investment that often goes overlooked, and which can be equally satisfying, is investing in a not-for profit organization. Although investing in a not-for-profit organization may not provide you with a large rate of return or the ability to take an ownership interest in the organization in which you are investing, the investment likely will have a positive impact on your community and may even be tax-deductible.

Before deciding to invest in a not-for-profit organization, investors should realize that not all not-for-profit organizations are created equal. Understanding the differences and knowing the possible tax benefits some organizations can provide will help you make an informed decision on whether investing in a not-for-profit organization is the right choice for you.

In general, not-for-profit organizations, also known as non-stock corporations, are organizations whose primary objective is to support and further some matter of private interest or public concern for noncommercial purposes. As a result, not-for-profit organizations cannot distribute their income to members, directors, officers or shareholders, but, rather, must use the organization’s income to pursue their objective. Not-for-profit organizations can take the form of a corporation, an individual enterprise (for example, individual charitable contributions), unincorporated association, partnership, foundation or any other type of entity allowed under state law.

Not-for-profit organizations are organized under state law and must be designated as a not-for-profit organization when created. They are creatures of statute, and may only pursue purposes permitted by the statute under which they are created. In Illinois, not-for-profit organizations are governed by the General Not For Profit Corporation Act of 1986. Under Illinois law, not-for-profit organizations can be created for purposes that include, but are not limited to: charitable, educational, civic, patriotic, political, religious, social, literary, athletic, scientific, agricultural, professional, commercial or industrial purposes.

Investors should also be aware of the benefits available to many not-for-profit organizations. First, many not-for-profit organizations are tax-exempt. The pursuit of tax-exempt status is a voluntary choice and not-for-profit organizations are free to be taxable if they choose to be. In order to obtain tax-exempt status, a not-for-profit organization must apply with the IRS, and should be organized and operated for a tax-exempt purpose, such as a not-for-profit organization that is charitable in nature.

The second benefit is that some not-for-profit organizations have the ability for donors to claim federal income tax deductions for contributions made to the organization.

A general misconception exists that donations and investments made to all not-for-profit organizations are tax-deductible. This misconception is furthered by the ability of some not-for-profit organizations to enjoy tax-exempt status. In reality, donations and investments made to many not-for-profit organizations are not tax-deductible. Moreover, simply because a not-for-profit organization enjoys tax-exempt status does not in and of itself mean that contributions made to the organization are tax-deductible. 

Investors should take note that only certain types of not-for-profit organizations, such as those registered as an IRS Section 501(c)(3) charitable organization, afford donors the ability to give tax-deductible donations. A not-for-profit organization registered under Section 501(c)(3) is a unique type of not-for-profit organization that is organized and operated for the purpose of achieving goals of a general philanthropic nature (i.e. those organizations organized and operated exclusively for a religious, charitable, scientific, literary or educational purpose). Therefore, while all 501(c)(3) charitable organizations are not-for-profit organizations, not all not-for-profit organizations are 501(c)(3) charitable organizations.

Donations to 501(c)(3) charities generally are tax-deductible. As a result, before donating to a not-for-profit organization, it may prove wise to inquire whether the organization in which you are investing is a registered 501(c)(3) charitable organization.

Finally, it is important to note that not all contributions to Section 501(c)(3) charitable organizations are tax-deductible. For instance, in order for donations of $250 or more to be deductible, the donor must receive a written acknowledgement of the contribution from the organization receiving the contribution. The acknowledgement should include a description and estimate of the value of any goods or services received by the donor in consideration of the contribution. Also, if consideration is received in return for the donation, only the amount in excess of the value of the consideration likely is deductible. For instance, if a donor makes a $500 contribution to a 501(c)(3) charitable organization toward a charitable fundraiser, but obtains food and beverages at an event valued at $200 in exchange for the donation, the investor likely can deduct only $300.

Investing in a not-for-profit organization may not be a typical investment, and may not necessarily reward the investor with a return on investment that can be measured in dollars and cents. However, as articulated by Paul Newman, investors should look at investing in not-for-profit organizations not as philanthropy, but rather as investing in the community. iBi

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