To fully explain to you what a non-profit organization is, I feel that I must first explain to you what a profit organization is. A profit-organization exists primarily to generate more money than it spends. Profit organizations are required to pay taxes on all the profits they make. The owners can then decide whether they want to keep all the profit they make or spend more on the company. The shareholders can also decide to share some of it with employees through the use of various types of compensation plans, like employee profit sharing.
A non-profit organization is an organization that provides a particular service to the community. The word non-profit refers to a type of business; these types of businesses are governed by rules that do not allow distribution of profit to any of the owners. Most nonprofits businesses are organized into corporations. Most corporations are formed under the corporations’ laws of a particular state. Every state has provisions for forming nonprofit corporations; some permit other forms, such as unincorporated associations, trusts, etc., which may operate as nonprofit businesses on slightly different terms.
Unlike profit organizations, non-profit organizations are exempt from corporate income taxes. Section 501 of the Internal Revenue Code lists several circumstances under which corporations are exempt from these taxes. Section 501(c)(3) describes corporations serving charitable, religious, scientific or educational purposes serves no part of the income of which "inures to the benefit of" anyone. Tax-exempt nonprofit corporations can, and do, operate in all other aspects of business like any other corporation. They have bank accounts; own productive assets of all kinds; receive income from sales and other forms of activity; including donations and grants if they are successful at finding that sort of support; make and hold passive investments; employ staff; and enter into contracts of all sorts.
There are some specialized tax...