Difference Between Nonprofit Corporation and 501c3

While all nonprofit corporations aim to serve the public, only 501c3s have tax-exempt status, allowing them to skip federal income taxes and accept tax-deductible donations. A nonprofit doesn’t automatically get these perks but can achieve them by gaining 501c3 status. 

This guide explains the difference between a nonprofit corporation vs. 501c3 and how your nonprofit can apply for 501c3 status.

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What Is a Nonprofit Corporation?

nonprofit corporation is a distinct legal entity formed with the primary intent of benefiting society and the greater public good. Whether its focus is on welfare, educational, charitable, religious, or other societal causes, its main objective is not profit generation but service.

Benefits of Forming a Nonprofit

Forming a nonprofit comes with several advantages:

  • They can receive donations.
  • They can apply for grants to support their mission.
  • They can employ individuals and possess assets, such as property.

How to Start a Nonprofit

Every state has its distinct rules about setting up a nonprofit. Commonly, you would need to:

  • Name Your Nonprofit — Choose a name aligned with your mission and state regulations.
  • Appoint a Registered Agent — An essential contact for legal documents in your state.
  • Select Board Members & Officers — Directors oversee operations, and officers execute responsibilities. This is called establishing a board of directors.
  • File Articles of Incorporation — Document required for state incorporation; names vary by state. Most states refer to it as the Articles of Incorporation.
  • Draft Bylaws & Conflict of Interest Policy — Central governing rules and ethical guidelines for your nonprofit called bylaws.
  • Conduct an Organizational Meeting — The first official meeting includes bylaw adoption and officer appointments.
  • Obtain an EIN — All nonprofit corporations must obtain an EIN for tax purposes.

Once you form your nonprofit organization, there are different types of nonprofits that fall under different IRS guidelines. While nonprofits can choose to apply for federal tax-exempt status under Internal Revenue Code 501c, most choose to apply for 501c3 status.

What Is a 501c3?

501c3 – also formatted as 501(c)(3) – is a specific Internal Revenue Service (IRS) tax classification for nonprofits that allows for tax exemptions and the ability to accept tax-free donations. This typically includes religious organizations and organizations formed for educational, charitable, or public welfare purposes.

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Benefits of 501c3 Designation

  • Enhanced Tax Exemption: While many nonprofits are exempt from certain taxes, 501c3 organizations benefit from an extensive range of federal income tax exemptions, offering substantial financial advantages.
  • Eligibility for Public and Private Grants: Only 501c3 organizations can apply for specific public and private grants, allowing them access to a broader pool of funding opportunities.
  • Tax-Deductible Donations: One of the standout features of a 501c3 is the ability to offer donors tax deductions on their contributions. This not only incentivizes donations but can also elevate the reputation of the organization among potential benefactors.
  • Lower Postage Rates: 501c3 organizations can benefit from discounted postage rates for certain bulk mailings, which can significantly reduce operational costs.
  • Potential for Property Tax Exemptions: Depending on the state, these organizations might also be exempt from property taxes, further accentuating the financial benefits of this designation.

Applying for 501c3 Status

There’s a common misconception that every nonprofit is a 501c3. The reality is that while many nonprofits seek this tax-exempt status, not all are eligible or even choose to apply.

The 501c3 status comes with specific obligations that might not apply to a standard nonprofit corporation. For instance, they need to file IRS Form 990 annually to keep financial transparency. 

Additionally, their operations, especially regarding political and lobbying activities, are under stricter regulations to maintain this tax-exempt status.

How to Apply for 501c3 Status

Seeking 501c3 status requires sending several documents to the IRS:

  • Financial Statements — New charitable organizations (less than three years old) must offer a financial statement for the present year and projected budgets for the subsequent two years. If your organization has been in operation for more than three years, provide financial statements for those years.
  • IRS Form 8718 — This form, along with the necessary “Exempt Organization Determination” fee, needs to be attached to your application.
  • IRS Form 1023 — This is the actual 501c3 application. Depending on your organization’s specifics, you might need different versions of this form, all available on the IRS website.

See our review of the best nonprofit formation services to get started.

After Forming a Nonprofit

  1. Open a Bank Account — Establish a financial record for transparency and legitimacy. Read our Best Banks Review.
  2. Get Insurance — Nonprofits will need to protect themselves from multiple business risks and liability issues with insurance.
  3. Purchase Accounting Software — Accounting software that complies with Generally Accepted Accounting Principles (GAAP) is highly recommended for nonprofits.
  4. Maintain Ongoing Compliance — Ensure your nonprofit stays in good standing by meeting all annual reporting requirements, tax filings, and any other state-specific obligations.
  5. Build a Fundraising Strategy — Developing a plan for raising funds is crucial to sustain and grow your nonprofit. This includes grant writing, donor outreach, events, and online campaigns.
  6. Develop an Operational Plan — Outline the day-to-day activities, define roles and responsibilities, and set short and long-term goals.
  7. Engage with the Community — Foster relationships with stakeholders, volunteers, and beneficiaries. Their feedback and support are invaluable to your nonprofit’s success.
  8. Promote Transparency — Maintain open financial and operational records. Transparency builds trust with donors, stakeholders, and the communities you serve. You may want to create a conflict of interest policy.
  9. Stay Updated with Laws and Regulations — The nonprofit sector has evolving regulations and requirements. Regularly review state and federal guidelines to ensure your organization remains compliant.
  10. Participate in Networking and Training — Join associations, attend seminars, and involve in nonprofit communities to share knowledge, gain insights, and build partnerships.

FAQs

What is the primary difference between a nonprofit corporation and a 501c3 organization?

nonprofit corporation is established to serve public interests without distributing profits to its members. 

On the other hand, a 501c3 is a specific type of nonprofit that is exempt from federal income tax.

So, while most nonprofit organizations are 501c3s, not all nonprofits are 501c3 entities.

Are all nonprofit organizations automatically classified as 501c3?

No, to gain 501c3 status, a charitable organization must apply for and meet specific criteria set by the IRS, including being organized exclusively for particular purposes like charitable or educational activities.

If I start a nonprofit corporation, will it automatically get tax-exempt status?

No, forming a nonprofit doesn’t automatically grant tax-exempt status. To achieve that, you’d typically apply for 501c3 status with the IRS, which, when granted, provides tax exemption and tax deduction benefits.

What are the benefits of a 501c3 designation over a standard nonprofit?

501c3 tax-exempt organizations enjoy exemption from federal income tax, making them financially advantageous with regard to certain tax implications. Furthermore, they can accept donations that are tax-deductible for the donors, which can be a significant incentive for potential benefactors.

What are the main purposes that qualify an organization for 501c3 status?

The organization must be organized and operate exclusively for charitable, religious, educational, scientific, literary, or testing for public safety purposes.

Can a 501c3 engage in political activities?

No, 501c3 organizations are prohibited from participating in political campaigns or lobbying activities. However, other types of exempt organizations (e.g., 501c6, etc.) may engage in certain political activities.

If I want to make my nonprofit a 501c3, where should I start?

You’d need to apply with the IRS, providing detailed information about your organization’s structure, purpose, and operations. Consulting with a nonprofit formation specialist can help streamline this process.