Entrepreneurship and Small Business (ESB) Certification Practice Exam

Which type of organization has no ownership and does not pay U.S. federal taxes?

1. For-profit organization

2. LLC

3. Non-profit organization

4. Partnership

The correct answer is: Non-profit organization

A non-profit organization is designed to operate for purposes other than generating profit for owners or shareholders. Their primary goal is often related to furthering social causes, educational initiatives, charitable activities, or other community-oriented objectives. Because non-profits are established to benefit the public rather than private interests, they enjoy tax-exempt status under U.S. federal law. This means that they do not pay federal income taxes on the funds they receive, as long as they adhere to the regulations that govern such organizations. This tax-exempt status allows them to focus their resources on their mission rather than on tax liabilities, enabling them to allocate more funds toward programs and services that benefit their cause. Additionally, contributions made to non-profit organizations may be tax-deductible for the donors, which incentivizes donations and further supports the organization’s ability to achieve its goals. In contrast, for-profit organizations are structured to generate profit for their owners; LLCs can be either for-profit or non-profit depending on how they are set up, and partnerships can also be for-profit entities. All of these types of organizations typically have tax obligations, unlike non-profits which are exempt from federal taxation when they meet specific criteria.