Choosing a Charitable or Non-Charitable Nonprofit

Choosing a Charitable or Non-Charitable Nonprofit

The law of nonprofit organizations can be confusing, because there are two meanings for the word charitable. One refers to a charity that, for example, aids the poor. The other refers to the broader IRS definition that includes all organizations that can accept tax-deductible contributions. These include educational, religious, scientific, patriotic, and many other types of organizations that are classified under Section 501(c)(3) of the Internal Revenue Code.

If at all possible, you should form your organization to comply with this section, and therefore become a charitable organization. To do so, you must draft your statement of purpose to fit into the permitted purposes under the law.

If your planned activities don’t meet the requirements to qualify your group as a Section 501(c)(3) organization, such as if you plan to do substantial lobbying for new laws or to contribute to political campaigns, you can form a non-charitable nonprofit organization under one of the other exemptions. These include:

  • business leagues (trade associations) under Section 501(c)(6)
  • chambers of commerce under Section 501(c)(6)
  • civic leagues under Section 501(c)(4)
  • employee associations under Section 501(c)(4), (9), or (17)
  • labor organizations under Section 501(c)(5)
  • lodges under Section 501(c)(10)
  • recreational clubs under Section 501(c)(7)
  • social clubs under Section 501(c)(7)
  • social welfare organizations under Section 501(c)(4)
  • veterans' organizations under Section 501(c)(19)

Under these sections, an organization can be exempt from paying income taxes, but contributions given to it are not tax-deductible as charitable contributions. However, they might be tax­ deductible for another reason. For example, dues to a trade association are usually tax-deductible for businesses in the same trade.

  • Definition of a Nonprofit Corporation
    A Nonprofit corporation is a special type of corporation that has been organized to meet specific tax-exempt purposes. To qualify for Nonprofit status, your corporation must be formed to benefit: (1) the public, (2) a specific group of individuals, or (3) the membership of the Nonprofit. Examples...
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  • Reasons to Form a Nonprofit Corporation
    As someone involved with a charitable cause, you might be weighing the benefits of formally organizing your nonprofit. While it might take a little extra work, only with a state-recognized nonprofit corporation can you obtain private and public grants, low-cost postage rates and be exempt from...
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  • Comparing a Nonprofit to an LLC or Corporation
    Nonprofit corporations enjoy the same liability protection as regular corporations and limited liability companies. In other words, your directors, trustees, members, and employees are not generally responsible for corporate debts and liabilities. There are also significant federal and state tax...
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  • Tax Exemption for Nonprofits
    Forming a nonprofit corporation with your state does not automatically qualify you for federal tax exemption with the IRS. Once you have created your nonprofit by filing the necessary documents with your state, if you want federal tax exemption, you must file a separate application with the IRS....
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  • Commercial Rights of Nonprofits
    The fact that a corporation is a nonprofit does NOT mean the corporation cannot sell goods or services for money. In fact, many nonprofits make money selling everything from clothing to medical services. A nonprofit can pay salaries to officers and employees. But, in order to maintain nonprofit...
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  • Managing a Nonprofit Corporation
    Directors are responsible for the management and operation of a nonprofit corporation. Nonprofit directors can serve with or without compensation. If you decide to compensate directors, remember that compensation must be deemed "reasonable" by the IRS. Directors are under the same constraints of...
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