What Is a Nonprofit?
Let’s start with the basics. A nonprofit corporation is an organization that has a purpose far beyond making a profit. Instead of owners and shareholders keeping the company’s earnings like they might in a C Corp, a nonprofit typically focuses on its larger mission, donating revenue toward a specific cause or goal that benefits the public.
According to the National Council of Nonprofits, there are more than 1.3 million charitable nonprofits in America.
However, being a nonprofit doesn’t mean that the company doesn’t make money. It just means that the company must put the money it does make back into the organization to pay for employee salaries, administrative expenses and other overhead costs.
The Benefits of Starting a Nonprofit
There are three main advantages to becoming a nonprofit:
There are also a few disadvantages of becoming a nonprofit:
Forming a Nonprofit in Your State
Each state has different rules, regulations and fees for forming a nonprofit. For example, it costs $270 to start a nonprofit in Maryland, but in Kentucky, it only costs $8. Use Incfile’s filing fees chart to easily research and compare state fees before starting your business.
Four Types of Nonprofit Organizations
There are four main types of nonprofit in the United States. Each type has slightly different goals and corporate structure (but all are tax-exempt!). They include:
Charities, also known as 501(c)(3) organizations, typically provide low-cost or free services to the public using funds received through donations. This can be through private donations or fundraising events specifically designed to get funding from members or advocates. Examples of public charities include food banks and animal welfare organizations.
This type of group is member-based and sets out to achieve specific goals regarding political change without achieving a profit. Social advocacy organizations, classified by the IRS as 501(c)(4), use donations and member dues to send out information that promotes a particular social agenda. The NAACP and the ACLU are social advocacy organizations you may be familiar with.
Like charities, foundations are also classified as 501(c)(3) organizations. They often work to better the community, whether contributing financially to local, smaller charities/nonprofits or holding events that benefit communities. They are funded by and contribute on behalf of an associated for-profit corporation. Foundations must donate a certain amount of income to other organizations every year. The Bill and Melinda Gates Foundation is one of the most well-known foundations.
These types of organizations are classified as 501(c)(6). They typically work to benefit and promote members’ business interests and are funded primarily through membership dues. Common trade and professional organizations include chambers of commerce and real estate boards.
Nonprofit vs. Not-for-Profit: Is There a Difference?
While similar, the terms nonprofit and not-for-profit are not interchangeable. Both types of organizations exist to collect and distribute money, but they are treated differently for the purposes of taxes, charters and financial reasons.
The most significant difference between nonprofits and not-for-profits is that a nonprofit is a formal, legal entity for tax, governance and management purposes (similar to an LLC or corporation). A not-for-profit isn’t generally a separate legal entity, and they are less common than nonprofits.
Nonprofit corporations exist for charitable purposes, like offering assistance to socially disadvantaged people, providing education, promoting the arts or running an animal shelter. They typically carry out bigger-scale, organized charitable activities.
Not-for-profit organizations are generally associations formed by groups of people for achieving the organization’s objectives. This could include membership associations, sports clubs, civic leagues and business leagues.
While nonprofits can apply for tax-exempt status, not-for-profits do not qualify for tax-exempt status under 501(c)(3). Instead, a not-for-profit needs to meet 501(c)(7) IRS guidelines to be considered for tax-exempt status. The IRS mandates that a not-for-profit must be organized for pleasure, recreation and other similar non-profitable purposes.
Is Starting a Nonprofit Right for You?
Nonprofits are usually established with a higher purpose in mind, like a religious, educational or charitable cause.
If you’re passionate about a particular cause, creating a nonprofit may be right for you. But don’t go it alone — there are complicated rules for establishing a nonprofit and attaining tax-exempt status.
How to Start a Nonprofit Corporation
While the incorporation process is accessible to all nonprofits, only those that meet specific parameters can achieve the 501(c)(3) tax-exempt status and corresponding benefits. Despite how attractive this sounds, you shouldn’t enter into a nonprofit lightly. While tax-exempt status sounds great, for most founders out there, the reason to start a nonprofit goes beyond saving on taxes.