A nonprofit corporation is a state entity not automatically exempt from taxes. To get federal tax exemption, a nonprofit corporation must be approved as a 501(c)(3) by the IRS. This allows donors to deduct donations. A 501(c)(3) is organized to benefit society, not generate profits.
Nonprofit Corporation vs. 501(c)(3)
What’s the difference between a nonprofit corporation and 501(c)(3)? A nonprofit corporation is formed at the state level. To get federal tax exemption, it must apply and be approved by the IRS as a 501(c)(3). Donors can only deduct donations to 501(c)(3) nonprofits.
States have their own rules for nonprofit corporations. The process usually involves filing paperwork and paying a small fee. State nonprofit status comes with some tax relief but not full federal tax exemption. To achieve full tax exemption, an organization must be recognized as a 501(c)(3) by the IRS.
Types of Tax-Exempt Organizations
Is a non profit organization the same as a 501c3? A 501c3 is a specific type of nonprofit that is exempt from federal income tax. However, not all nonprofits are 501c3 entities. A charitable organization must meet specific criteria set by the IRS to obtain 501c3 status.
The difference between a 501c3 and a 501 C )( 10 lies in their purposes. A 501c3 operates exclusively for charitable, religious, educational, or similar purposes. In contrast, a 501 C )( 10 serves the interests of members of a certain profession.
The IRS 501(c)(5) status provides exemption for labor, agricultural or horticultural organizations. Examples of 501(C)(6) organizations include business leagues, chambers of commerce, and professional football leagues. These organizations are designed to promote business conditions without profit focus.
Proof of 501(c)(3) Status
Proof of 501c3 status can be shown by:
- A listing in the IRS’s most recent list of tax-exempt organizations under section 501(c)(3).
- A currently valid IRS tax exemption certificate.
Organizations with 501(c)(3) status can be classified as public charities, private foundations, or private operating foundations. Section 501(c)(3) of the Internal Revenue Code allows for the federal tax exemption of these organizations.
Nonprofit organizations are not necessarily the same as 501(c)(3) organizations. The term "nonprofit" refers to the purpose of the organization, while "501(c)(3)" indicates that it has been recognized by the IRS as tax-exempt due to its charitable activities.
501(c)(3) Exemption Status
A 501(c)(3) organization is exempt from federal income tax under section 501(c)(3) of the U.S. Internal Revenue Code and may include various entities such as corporations, trusts, or associations. These tax exemptions apply to organizations operating exclusively for religious, charitable, scientific, literary, educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.
Obtaining 501(c)(3) tax-exempt status has several advantages:
- Exemption from federal income tax.
- Ability to receive tax-deductible donations.
Although the IRS recognizes over 30 types of nonprofit organizations, only those with 501(c)(3) status can offer tax deductibility for donations. Most 501(c)(3) organizations are either charitable societies, private foundations, or religious entities.
Non-Profit Corporations vs. LLCs
Non-profit corporations with 501(c)(3) status are incorporated without stockholders and cannot benefit from LLC’s tax-exempt status directly. They may, however, operate LLCs as wholly owned subsidiaries to reduce liability risk.