People often use the terms “nonprofit corporation” and “501(c)(3)” synonymously. However, they don’t necessarily mean the same thing, and it’s important to know the distinction if you plan to operate as a nonprofit organization.
A Nonprofit Corporation is a state-registered business entity that exists for the public good or a charitable cause instead of the goal of generating profits and providing financial gains for its shareholders. Nonprofit Corporations do not have owners (shareholders), nor do they issue stock or pay dividends to individuals or other business entities. Registering as a nonprofit corporation may provide certain benefits, such as exemptions from state sales, property, and income tax. Also, depending on how the federal government classifies a nonprofit organization, it may qualify for full or partial exemption from federal income tax, unemployment tax, and certain other taxes. Learn more about Nonprofit Corporations.
A 501(c)(3) is a nonprofit entity that qualifies for federal income tax exemption under Internal Revenue Code (IRC) section 501(c)(3). Entities that can request 501(c)(3) status from the IRS include Nonprofit Corporations, trusts, community chests, unincorporated associations, and—in limited instances—LLCs. Most 501(c)3 organizations are formed as Nonprofit Corporations. Learn more about applying for 501(c)(3) status.
The 501(c)(3) is among over 30 other types of nonprofits recognized by the United States federal tax code. One of the distinguishing characteristics of the 501(c)(3) versus many other classifications of nonprofits is that individuals’ or businesses’ charitable contributions to the 501(c)(3) are tax-deductible for the donors.
Organizations that typically meet the requirements for being exempt from federal income and unemployment tax under IRC section 501(c)(3) include:
- Charitable organizations – Organizations created and operated for specified purposes.
- Charitable
- Religious
- Scientific
- Educational
- Testing for public safety
- Literary
- Preventing cruelty to children or animals
- Fostering national or international amateur sports competition
- Private foundations – These nonprofits usually have a single primary source of funding—for example, gifts from a corporation or a single family. Most foundations’ primary activity is awarding grants to other charities or individuals.
- Religious organizations – Churches, associations of churches, and integrated auxiliaries fall into this category.
- Political organizations – Political parties, campaign committees, and political action committees organized and operated to directly or indirectly accept contributions or make expenditures for an exempt political-related function under section 527 of the Internal Revenue Code may qualify for 501(c)(3) status.
Advantages of Seeking 501(c)(3) Status
If an organization’s founders file the required forms and take other steps to form their business as a Nonprofit Corporation in their state, they are not guaranteed federal tax exemption. For tax-exempt status at the federal level, a nonprofit must apply for recognition of exemption from the IRS and obtain a ruling or determination letter that verifies tax exemption. For example, charitable organizations may not be tax-exempt from federal income and unemployment taxes unless they file IRS Form 1023, Application for Exemption Under Section 501(c)(3) of the Internal Revenue Code. Other types of 501(c)(3) nonprofits must file IRS Form 1024 for recognition of tax exemption.
Below is an at-a-glance comparison of the potential benefits of operating as a Nonprofit Corporation with the 501(c)(3) designation vs. without it.
without 501(c)(3) Status | with 501(c)(3) Status | |
|---|---|---|
| Able to accept tax-deductible donations | ||
| Greater likelihood of being eligible for grants and government programs | ||
| Exemption from state sales tax on purchases | ||
| Exemption from state income tax | ||
| Exemption from state property tax | ||
| Exemption from federal income tax | ||
| Exemption from federal unemployment tax | ||
| Exemption from federal excise tax | ||
| Limited personal liability | ||
| Greater access to discounts from merchants and service providers |
Breaking Down Similarities and Differences
Tax Exemption
People often think that all nonprofit organizations are tax-exempt. However, that’s not always true! Incorporating a nonprofit organization doesn’t guarantee tax exemption. A nonprofit corporation is formed by filing Articles of Incorporation with the state. However, to achieve tax-exempt status, it must meet the eligibility requirements of one of the exempt organization categories in the Internal Revenue Code to be recognized as tax-exempt for federal income tax. For instance, a nonprofit must meet the criteria in IRC section 501(c)(3) to be classified as tax-exempt as a charitable organization, and a nonprofit must meet the requirements in IRC section 501(c)(7) to be classified as tax-exempt as a social club. Similarly, a nonprofit must fulfill the rules of IRC section 501(c)(4) for tax exemption as a social welfare organization. IRS requirements for tax exemption vary for each type of nonprofit, and organizers must understand and comply with the rules to maintain tax-exempt status
Typically, states recognize a nonprofit’s federal income tax-exempt classification as exempt from state income tax as well. Also, some states do not levy sales tax on nonprofits provided they comply with the state’s rules.
The application form used for IRS recognition of federal tax-exempt status depends on an organization’s type of exempt organization.
| Type of Nonprofit | Form ID | Form Name |
|---|---|---|
| 501(c)(3)for charitable organizations | IRS Form 1023 or 1023-EZ | Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code |
| All nonprofits described in section 501(c), other than sections 501(c)(3), (4), or section 501(d) | IRS Form 1024 | Application for Recognition of Exemption Under Section 501(a) or Section 521 of the Internal Revenue Code |
| 501(c)(4) for social welfare organizations | IRS Form 8976 | Notice of Intent to Operate Under Section 501(c)(4) |
| 521(b)(1) for farmers cooperatives | IRS Form 1028 | Application for Recognition of Exemption Under Section 521 of the Internal Revenue Code or Form 1024 |
| 527 for political organizations (with some exceptions) | IRS Form 8871 | Political Organization Notice of Section 527 Status |
A nonprofit must apply within 27 months after the end of the month of its formation to be determined as tax-exempt under section 501(c)(3) from its date of creation. The deadline for applying for recognition of tax-exempt status from the date of an organization’s formation varies for other types of nonprofits.
Depending on the circumstances, other federal forms may be required as well. For instance, nonprofits filing IRS Form 1023 for 501(c)(3) recognition and those filing Form 1024-A or Form 8976 for 501(c)(4) recognition must also file Form 8718 (User Fee for Exempt Organization Determination Letter Request) to submit the required fee for recognition of exemption.
Nonprofits must follow their state’s procedures when applying for state income tax and other exemptions.
Acceptance of Charitable Contributions and Grants
Some types of nonprofits can accept contributions from donors. Donors may take their contributions to nonprofit organizations under IRC sections 501(c)(1), 501(c)(3), 501(c)(10), 501(c)(13), and 501(c)(19) as tax deductions, but donations to other types of nonprofits are not tax-deductible. Individuals or entities who donate to charitable organizations must itemize those deductions on their tax returns.
501(c)(3) nonprofits can also get funding via grants from foundations and government agencies. Generally, the federal government, state and local agencies, and foundations award grants to charitable organizations but not to other types of nonprofit organizations.
Non-Exempt Income
All types of nonprofits must be careful about how they generate revenue because some activities may not be tax-exempt. If a nonprofit engages in activity that the IRS considers “unrelated business” to supplement its income, that revenue may be subject to income tax.
IRS criteria for determining if an activity is unrelated business:
- Trade or business – Selling goods or performing services.
- Carried on regularly – Done with frequency and continuity and comparable to commercial activities of nonexempt organizations.
- Not related substantially to furthering the organization’s exempt purpose – The trade or business activities do not have a causal relationship (aside from producing income) to achieving the nonprofit’s purpose.
Tax Filing Requirements
Most tax-exempt nonprofits, including the 501(c)(3), must file informational tax returns—Form 990 (or 990-EZ), Return of Organization Exempt from Income Tax—with the IRS annually even when they do not have to pay federal income tax. Private foundations must file Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation.
Use of Profits
While all nonprofits may compensate their organizers and staff with fair wages for their work, they may not use profits to benefit individual stakeholders financially. A nonprofit corporation must reinvest surpluses from income received through donations, sponsorships, and product or service sales to further its mission. When dissolving a nonprofit, its assets must be distributed to another qualified nonprofit group; it may not divide assets among stakeholders.
Personal Liability Protection
All nonprofit organizations are separate legal entities from their organizers, incorporators, directors, officers, and employees. Like a for-profit corporation, a nonprofit corporation protects the personal assets of individuals involved in forming, managing, and operating the organization from the business’s debts.
Additional Resources
Explore our other articles for more details about nonprofit corporations and the 501(c)(3):
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