Most of the estimated 1.5 million nonprofit organizations in the United States are 501(c)(3) organizations, but there are many other categories of nonprofits. The nonprofit’s membership, mission and structure dictate which category is most appropriate for your nonprofit.
Many nonprofits fall under 501(c)(3) for a good reason —the category includes entities that are organized and operated exclusively for religious, charitable, scientific or educational purposes; for testing for public safety; to foster national or international amateur sports competitions; or to prevent cruelty to children, women or animals. It also includes nonincorporated community chest, fund, cooperating association or foundation organized and operated exclusively for those purposes as well as any supporting organizations. Nonprofits that gain status as 501(c)(3) organizations are public charities (i.e., they support the public good).
Public charities are by far the largest type of 501(c)(3). These entities generally are funded through tax-deductible donations, government grants and membership dues.
Section 501(c)(3) also includes certain types of foundations. These entities usually fund other nonprofits through grants. To retain their tax-exempt status, foundations must donate a certain portion of their income on an annual basis. In addition, the foundation cannot perform any sort of political lobbying, although it can support nonprofits that lobby.
Private foundations are nongovernmental, nonprofit organizations or charitable trusts. They generally are funded by a single individual, family or corporation. Private foundations don’t solicit funds from the public. Instead, they support other 501(c)(3) organization, usually through grants.
Although all private foundations are 501(c)(3) organizations, they are further classified as either 509(a)(1), 509(a)(2), 509(a)(3) or 509(a)(4) entities. These classifications are narrowly defined as to the purpose of the foundation. Each has different requirements relating to how their income is calculated as well as other factors.
Private foundations are further subdivided into two categories: private nonoperating foundations and private operating foundations. Most private foundations fall into the former category. Practically speaking, the difference between them is how they distribute their income:
- Private nonoperating foundations grant money to other charitable organizations, but do not perform any charitable activity. This is the more common type of private foundation.
- Private operating foundations distribute funds to their own programs that exist for charitable purposes.
However they are classified, the classification works in conjunction with the foundation’s 501(c)(3).
Other types of organizations also may be designated as charitable organizations. The best thing to do when seeking information about these entities is to consult a professional tax advisor.
- Various: 501(c)(4)–501(c)(27). These sections of the Tax Code refer to specific types of nonprofits, from social advocacy groups to trade and professional organizations to veterans’ organizations. Each of these entities is subject to a specific set of rules regarding their funding, their lobbying efforts and other specific guidelines.
- Religious and Apostolic Associations: 501(d). Organizations falling under 501(d) are religious-based groups that share a common treasury. The community may engage in for-profit or not-for-profit activities. All income, however, must be deposited into and distributed from the common treasury. Political activity is not restricted. Donations are not tax exempt.
- Cooperative Hospital Service Organizations: 501(e). Section 501(e) organizations provide cooperative services for two or more hospitals. Most funding comes from tax-exempt donations.
- Cooperative Service Organizations of Operating Educational Organizations: 501(f). These organizations perform collective investment services for educational organizations.
- Child Care Organizations: 501(k). As the name suggests, these entities provide care for children.
- Charitable Risk Pools: 501(n). This category is used to pool certain insurance risks of 501(c)(3).
- Farmers’ Cooperative Associations: 521(a). These associations offer cooperative marketing and purchasing for agricultural producers.
Contact a Not-for-Profit MCB Advisor at 703-218-3600 or click here. To review a summary of recent articles related to exempt organizations, click here. To learn more about MCB’s Not-for-profit practice, click here. To learn more about MCB’s tax practice and our tax experts, click here.