Introduction to the Non-Profit Industry

Introduction to the Non-Profit IndustryThis white paper is the second in Smart Devine’s series for Not-for-Profit leaders, Board members and new employees as a reference tool for those who are new to the industry or thinking about starting a new organization.

Why a Non-Profit?There is so much more to the Non-Profit Industry than the lack of profit distribution to members. My goal in this paper is to provide background information concerning non-profit organizations, as well as, provide some clarity to your initial thoughts when asked the question: “What is a Non-Profit?”A non-profit organization is a tax-exempt group organized for the purpose of serving the public interest other than the pursuit of accumulating profits for owners or investors.Each organization must possess one of the follow-ing characteristics: charitable, educational, scientific, religious or literary, to foster national or international amateur sports competition, to promote the arts, or for the prevention of cruelty to children or animals. There are also supporting organizations which are often referred to as “Friends of” organizations.

Generally speaking, these non-profits are tax-exempt organizations that serve the public interest. The proper non-profit classification will allow the public to make do-nations to the organization and claim the donation from their federal taxes.

n Like-Minded CultureBoard members need to understand the key char-acteristics of the organization in order to share the passion for the cause’s mission with like-minded individuals, who are, most often, volunteers. Sometimes the mission of the cause is not always enough to keep volunteers coming back. Keeping the volunteers engaged in the mission, while understanding the limitations of the volunteers when delegating tasks and responsibilities, is critical when working towards a common goal. Most non-profits are “under-resourced”, which can lead to a weaker infrastructure if volunteers are not properly resourced for projects.

n Financial ActivityUnderstanding the link between financial support and sustaining the mission of the non-profit is integral for continued success of any organization. When neces-sary, training new board members on the differences between public and non-profit accounting should be part of their orientation process. n Governance and Supporting RolesThe board of directors has a dual role within a non-profit organization. The board must ensure that the organiza-tion’s public interest is served, as well as assist in the organization’s initiative and activities.

Types of OrganizationsThe Internal Revenue Code defines more than 28 categories of non-profit organizations that are exempt from federal income taxes. This paper provides a basic overview of the non-profit industry concentrating on the non-profit designation most recognized by the public: charitable organizations classified under the IRS code, 501(c)(3). A 501(c) organization is an American tax- exempt nonprofit organization. Section 501(c) of the United States Internal Revenue Code (26 U.S.C. § 501(c)) provides the types of nonprofit organizations that are exempt from some federal income taxes. Three types of 501(c)(3) charitable organizations are recognized by the U.S. tax code: • Public Charitable Organizations• Private foundations• Private operating foundations

Public Charitable OrganizationsPublic charities, which represent the largest share of ac-tive 501(c)(3) organizations, perform activities that direct-ly support the charities’ philanthropic cause. Examples of public charities include: Churches or conventions /as-sociates of churches, certain educational organizations, hospital and medical research organizations.

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Programs are geared to satisfy the vision of the public charity. The essence of a public charity lies within the structure and its applicable revenue source. The structure of a public charity must be organized exclusively to satisfy the mission statement defined in the organization’s strategic business plan, which also must be aligned with the characteristics defined under the 501(c)(3) IRS code. The IRS requires certain lan-guage to be in a public charity’s articles of incorporation which explicitly restrict its activities. The IRS requires a public charity to maintain a diversified board of directors that serve the public interest. Board members must have no personal stake in the organi-zation, either directly or through relationship with any other voting or non-voting board member, officer, director, trustee or key employee. No compensation agreements should exist with any board members for their role within the organization’s board. A public charitable organization accepts donations and other financial support from a wide, diverse audi-ence of individuals, foundations and government enti-ties. To be classified as a Public charitable organization, an active continuing program must exist that defines the organization’s approach to raising funds/receiving donations from a number of sources, such as private organizations, funding agencies, the general public, and government entities. By law, public charities cannot raise more than one-third of their income from unrelated commercial activity or investments.

Private FoundationA Private foundation solicits funds and donations from a limited number of members who contribute a major por-tion of donations to the organization. Often, foundations do not actively or directly engage in actual charitable work. Their main function is providing monetary support towards other organizations, who conduct the charita-ble activities/work towards the charity’s cause.A benefit of the private foundation status over public charity is control. Unlike public charities, private foun-dations can be controlled by related parties and be funded by a relatively small group of individuals. Some foundations are established by a single family to satisfy a specific charitable cause. The limitation on solicitation of funds is much less than that of a public charity. In addition, private foundations do not have to meet the Public Support test.

Private Operating FoundationThe third type of 501(c)(3) is known as a private operat-ing foundation. A private operating foundation uses the bulk of its income to actively run its own charitable pro-grams or services, which may include the operation of a museum, library, research facility or historic property.Private operating foundations have attributes of both a public charity as well as a private foundation. Control over the organization can be similar to a private founda-tion, but includes some of the benefits of public chari-ties. These types of 501(c)(3) organizations are not prev-alent in society and is created in rare circumstances.

Other Non-profit OrganizationsThere are non-profit organizations that have been formed that do not meet the qualifications to attain a 501(c)(3) status. These “hybrid” organizations have a mixed structure of different types of profit and non-profit organizations. They do not classify as charitable organi-zations and as such cannot claim tax exemption under section 501(c)(3). Selective tax exemptions are available under different clauses of Section 501(c) for such orga-nizations. Some examples include:• Advocacy Groups: formed to influence the legisla-

tions or Government policies on particular issues.• Membership Organizations: formed for the benefit

of the members of the organization.• Recreational Clubs: formed to provide recreation fa-

cilities and platform for its members.• Auxiliary Organizations: formed as a subsidiary or

as a support organization to a parent organization. • Employee Benefit Funds: formed to formulate plans

and raise funds for employee benefits.

What type of non-profit is best?There is no clear answer as to what type of non-profit status will most benefit any organization. Each type of non-profit organization discussed within this paper has multiple benefits which are diverse in nature. The benefit derived from each type is dependent upon the mission of your organization, the nature of the activities involved within its operations, as well as, the accurate manage-ment of the key characteristics affecting the non-profit organization’s culture. Due diligence, speaking with indi-viduals experienced in setting up non-profits, and find-ing credible resources and professionals to guide you is critical to the success of any non-profit organization.

Smart Devine provides a full range of accounting, advisory, tax and investigative forensic and litigation services to organizations across a variety of industries. For more information about our services call 267-670-7300 or visit our website at smartdevine.com.

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A c c o u n t i n g T a x A d v i s o r y

CHRISTOPHER NIWINSKI & SMART DEVINE CAN HELPChris Niwinski and the Non-Profit Practice at Smart Devine can guide you and inform you about being effective in planning and developing a strong organization. We offer a series of white papers to non-profit organizations’ board members and leadership to enhance the understanding of duties and requirements for non-profit organizations. Please contact Chris for more information at 267-670-7345 or email cniwinski@smartdevine.com

Topics:• Introduction to the Non-Profit Industry• The Do’s and the Don’ts of Starting a Non-profit organization• What is My Role as a Board Member? • Understanding Non-Profit Financial Statements• Accounting for Endowments and Restricted Gifts• Understanding IRS Tax Form 990• Differences Between Non-Profit and For Profit Accounting• Fundraising and Development’s Impact on the Finance Department• The Board’s role in Risk Management• Non-Profit Planning• Challenges Facing Non-Profits

Christopher J. Niwinski, CPA Senior Consulting ManagerChristopher is a Senior Manager for Smart Devine. He has over 17 years of non-profit management consulting experience. He has extensive experience providing interim financial and operational management within the non-profit industry, specifically to hospitals, health systems and higher education institutions as well as government, foundations and other non-profit entities. Chris has also provided assistance to these clients through internal audits and control assessments, best practices reviews, finan-cial system process improvements, as well as grant and endowment management and expenditure reviews of non-profit entities receiving financial assistance.Chris earned his Bachelor of Science in Accounting from LaSalle University. He is a Certified Public Accountant in Pennsylvania and is a Member of the American Institute of Certified Public Accountants and the Pennsylvania Association of Certified Public Accountants, as well as on the Board of Directors of the Healthcare Financial Management Association (HFMA) and the LaSalle University Alumni Association.

ACCOUNTING OPERATIONSGAAP Audits A-133 AuditsSponsored Program ComplianceBudgetingEndowment Spend ReviewFinancial Risk AssessmentAccounting Outsourcing

FINANCIAL ADVISORYReconciliation and RemediationFinance Process Assessment and Reporting OptimizationInternal Audit OutsourcingEnterprise Risk ManagementInternal Control AssessmentsIT Audit

TAXESForm 990, 990PF, 990T, 1023 & 5500 ComplianceSales and Use Tax Exemption IssueEmployment Tax AssistanceTax Free financing Analysis501(c)(3) Tax Exempt Status QualificationsTax Controversy Support

CONSTRUCTION AND FACILITIESMonitoring Project Progress / Analyzing Cost EstimatesAdministration of Escrow AccountsCash Flow AnalysisIdentification of Sources of RecoveryFinancial Analysis of Builder

REVENUE MANAGEMENT ANDCOMPLIANCECredit Balance AnalysisComplianceRevenue Integrity ServicesReimbursementExpense Management

LITIGATIONInternal InvestigationsForensic AccountingFraud / Billing IssuesLitigation Support

Smart Devine provides the superior service your organization deserves. Our enhanced list of services include:

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