Non-profits and Charitable organizations: Same or different?

Many people believe that nonprofits and charitable organisations are the same. If you are one of them, this article is for you, where we will try to explain how both are different from each other: be it from a legal point of view or purely in the sense of purpose.

While all charities are nonprofits, not all nonprofits are charities.

Nonprofits come in many forms and serve multiple functions, from schools, hospitals, and food banks to business leagues, political action committees, and labour unions. All of these entities can be nonprofit, and most of them are eligible for exemption from income tax. However, not all of them are charities.

Definition of a nonprofit

A nonprofit is based on the simple premise that none of the corporation’s net profit from donations, membership fees or business activities will benefit any individual. Meanwhile, a charity is an organization with philanthropic goals that aim to improve the quality of life for the community and beyond.

Few points about nonprofits:

• A nonprofit company does not report profits, or in other words, it is not there to make money.
• While a non-profit organization distributes salaries to its employees (even the owner takes a salary), the workforce in a charity is voluntary and receives no compensation.
• Non-profits focus on a specific cause (or several causes).
• Funding for non-profits comes in the form of grants from organizations and donations from the general public.

Legal aspects

Government of India define a non-profit entity/NGO that has the following characteristic:

• They are private, i.e., separate from Government
• They do not return profits generated to their owners or directors
• They are self-governing, i.e., not controlled by the Government
• They are registered organisations or informal groups, with defined aims and objectives

In India, a Voluntary Organization / Non-Governmental Organization can be registered as Trusts, Societies, or a private limited nonprofit company, under section-8 Company of the Indian Companies Act, 1956.

1. Trusts: Public charitable trusts can be set up for several numbers of purposes including relief of poverty, hunger, education, medical relief or any other object of general public utility. There is no central law governing public trusts in India, although various states have their Public Trusts Act.
2. Societies are membership organisations that are registered for charitable purposes. Societies are generally governed by a governing council or a managing committee. Societies are governed by the Societies Registration Act, 1860, which are adapted by various states.
3. A Section 8 company(Old Section 25) under the Companies Act, 2013, is to promote non-profit objectives such as trade, commerce, arts, charity, education, religion, environment protection, social welfare, sports, research, etc. The profits/incomes of the company if any, are applied towards promoting the objectives of the company and are not distributed as dividends to its shareholders.

Taxation rules

Under amendments to Section 11(4A) of the Income Tax Act, 1961, a not-for-profit organization is not taxed on income from a business that it operates that is incidental to the attainment of the objects of the not-for-profit organization, provided the entity maintains separate books and accounts concerning the business. Furthermore, certain activities resulting in a profit, such as renting out auditoriums, are not treated as income from a business.

The income of a charitable or religious trust is exempt if 85% of its income is applied for charitable or religious purposes in India. If income applied for charitable or religious purposes during the previous year falls short of 85% because such income has not been received during the year or due to any other reason, an option is given to the assessee to apply such income in the future years in a prescribed manner.

Trust & societies are required to file their return if the income is more than the basic exemption limit and in the case of Section 8 company return needs to be filed irrespective of the Income as for Section 8 company there is no basic exemption limit.

Mythbuster

• Many individuals believe that nonprofit organizations don’t make any profit. And only for-profit organizations make a profit. This is a myth. The actual difference doesn’t lie in making profits; rather it lies in handling the profits.
• There are many nonprofits that are not charities. Homeowners associations, many youth sports clubs, certain social groups, veterans groups, religious organizations and even country clubs qualify as nonprofits because they serve their members’ interests rather than one person’s interest.
• Incorporated nonprofits are, essentially, businesses with a social mission. They can plan a business strategy for the organization and work to earn money, just like any business. However, they don’t earn money in the same way a for-profit company does. Instead, nonprofits make money by leveraging activities related to their mission.

Apart from all this, the most important thing to remember is:

Nonprofits do not exist simply to make money. Their goal is to make an impact.

References:

• For registration-related details: https://ngosindia.com/ngo-registration/
• For taxation related details: http://www.taxscoop.in/entries/income-tax/income-tax-filing-of-non-profit-organizations
• Government website for info on nonprofits and NGOs: ngodarpan

Originally published at https://shaktipreneurs.org on May 29, 2021.