Types of Nonprofit Organizations
There are three main types of charitable organizations: public charities, private foundations, and private operating foundations. The corporation is the most common, and usually best, form for a nonprofit organization. Nonprofits are sometimes referred to as non-stock corporations, or 501(c)(3) organizations. While enjoying federal tax benefits on income, nonprofits typically must pay employment taxes for hired staff. Nonprofits run with the purpose of maximizing revenues for the causes they support.
Nonprofit organizations are critical to addressing issues facing society. In the United States, there are over 1.6 million nonprofit organizations categorized as tax-exempt by the IRS. Public charities, foundations, social advocacy groups, and trade organizations are common types. Any profits generated by these organizations are not distributed. Additionally, nonprofits do not issue stock.
The federal tax code recognizes over 30 types of nonprofits. Nonprofits are separate legal entities from their incorporators and employees. Nonprofits are usually managed by their board of directors or members. Nonprofits must be formed according to their state’s rules.
Nonprofits are exempt from federal income tax under Section 501(c)(3) if they meet requirements. Each type serves a purpose and addresses different issues. There are five categories of nonprofits, but dozens of tax-exempt statuses. The common thread is a nonprofit cannot pay profits to individuals or shareholders. A nonprofit is different from a non-government organization which operates beyond the US borders.
Tax-Exempt Status Differences
501(c)(1) vs. 501(c)(3)
The most common nonprofit is a charity, which refers to an organization that operates to fulfill purposes such as religion, education, science, literature, public safety testing, amateur sports, and the prevention of cruelty to children or animals. Federal credit unions are the best example of 501(c)1 organizations. A 501(c)1 organization is not required to apply for tax-exempt status or fill out annual tax returns because they were organized by Congress.
Categories Within 501(c)(3)
Within the 501(c)(3) there are five additional types of charities: Private foundations, 509(a)(1), religious, scientific, literary. Does your nonprofit meet the requirements of a 501(c)(3) organization?