When most people think of nonprofit organizations, they are actually thinking of a 501c3, though many other types of not-for-profit organizations exist.
501(c)(3) is a tax-exempt designation given the IRS, These organizations are named after section 501(c)(3) of the Internal Revenue Code (IRC). All 501cs – and they go from 501(c)1 to 501(c)25 – are exempt from paying federal income taxes. Many 501(c)s are also tax-exempt in their own states.
Of all the tax-exempt organizations*, 501c3s are the most common. So, what is a 501c3? It can be any organization that fits the following criteria:
1. It must fall exclusively under one of these categories:
- religious
- charitable
- scientific
- public safety
- literary
- educational
- national/international amateur sports
- prevention of cruelty to children or animal
2. It can be any of the following structures:
- corporation
- community chest
- fund
- foundation
3. It must abide by the following restrictions:
- an individual person is not eligible for the 501c3 designation
- the organization's earnings cannot benefit a private shareholder or individual
- the organization cannot be involved in any political campaign activity
- the organization is limited in the degree it can lobby
Why would an organization want to be a 501(c)(3)? First, there’s the tax-exemption. Almost as importantly, donations to 501c3 nonprofits are generally tax-deductible to the individuals making the contribution. This is done to encourage charitable giving.
*While many people use the terms “non-profit” and “tax-exempt” interchangeably, strictly speaking they are not the same thing. Nonprofit status is decided by state law, while tax-exempt status is based on the IRC. Thus, not all nonprofits might be tax-exempt, and not all tax-exempt organizations might be nonprofits.
