Nonprofit Organization Examples

Deductibility and lobbying, and they trade against each other.

Gifts to a 501(c)(3) are tax deductible for the donor, and the organization can receive most foundation grants. In exchange it may spend no more than an insubstantial part of its activity on lobbying, and it may not support or oppose candidates for office at all.

A 501(c)(4) social welfare organization can lobby without a ceiling and can engage in some political activity, provided that is not its primary purpose. Donations to it are not deductible. The ACLU and the Sierra Club both run one of each, which is the standard structure for a cause that needs both capabilities.

The overwhelming majority of American nonprofits are small and local, and they are the realistic model for anyone starting one.

Typical examples: a parent teacher organization at a single school, a community garden, a volunteer fire company, a rescue that fosters animals in members' homes, a youth sports league, a neighbourhood association, a food pantry run out of a church hall, a historical society maintaining one building.

Around 1.97 million organizations are registered with the IRS and only about 300,000 have any paid employees. If your mental model of a nonprofit is a national charity with a marketing department, it describes a fraction of one per cent of the sector.

No, and the two words describe different things.

Nonprofit is a state law status. You incorporate as a nonprofit corporation with your Secretary of State, which means the entity has no shareholders and cannot distribute profits to owners.

Tax exempt is a federal determination made by the IRS under section 501. You apply for it separately, usually on Form 1023 or 1023-EZ, and until it is granted your nonprofit corporation is a taxable entity.

Organizations also lose exemption while remaining nonprofit corporations. The IRS revokes automatically after three consecutive years of missed annual filings, which happens to thousands of small organizations that did not realise the 990-N postcard applied to them.

Business leagues, chambers of commerce, real estate boards, trade associations and professional societies. The US Chamber of Commerce and the American Medical Association are among the largest.

The defining feature is that the organization improves conditions for a line of business or a profession as a whole, rather than performing services for individual members. An organization that mainly provides members with a commercial service is not a business league, it is a business.

Dues are not charitable deductions. They may be deductible as an ordinary business expense, though the portion attributable to lobbying is not, and 501(c)(6) organizations are required to tell members what that portion is.

The Ford Foundation is a private foundation: endowed, funded historically from one source, making grants from investment income. A local food bank is a public charity: funded by many donors, government contracts and food industry partnerships.

The distinction is about where the money comes from, not size or purpose. Some private foundations are tiny family funds with $200,000 in assets. Some public charities are enormous.

Consequences follow. Private foundations pay an excise tax on investment income, must distribute broadly 5% of assets annually, and face strict self-dealing rules that prohibit most transactions with insiders outright rather than merely requiring them to be reasonable. Donors also get a lower deduction ceiling.

Yes, and a well-run one should. The restriction is on distribution, not on generating a surplus.

A nonprofit that consistently spends exactly what it receives has no reserves, cannot absorb a late grant payment, and cannot invest in anything. Surplus that stays in the organization and funds the mission is entirely proper and is what building reserves means.

What is prohibited is inurement: distributing net earnings to directors, officers or other insiders. Paying reasonable compensation for real work is not inurement. Paying a board member above market rate for a nominal role is.

Separately, income from a trade or business regularly carried on and unrelated to the exempt purpose may be taxable as unrelated business income, even though the organization remains exempt.

The most common cause by far is not scandal, it is silence. Exemption is revoked automatically when an organization fails to file its annual return for three consecutive years, and the IRS publishes the revocation list.

This overwhelmingly hits very small organizations that took in under $50,000, believed they had nothing to file, and did not realise the 990-N electronic postcard still applied. Hundreds of thousands of organizations have been revoked this way since the rule took effect.

The consequences are real: donations stop being deductible from the revocation date, and the organization must apply for reinstatement and pay the fee again. Retroactive reinstatement is available in some circumstances if you act reasonably promptly.

For most people asking, 501(c)(3) public charity, and the question is usually settled by what you actually want to do.

Choose 501(c)(3) if you need deductible donations or foundation grants, and your work is charitable, educational, religious or scientific. Accept that you cannot campaign for candidates and cannot make lobbying a substantial activity.

Choose 501(c)(4) only if legislative or political work is the point of the organization rather than a supporting tactic, and you have funders who will give without a deduction.

If you are the only funder and intend to stay that way, you are heading toward private foundation status whether you intend it or not, and should decide that deliberately rather than discover it. Consider also whether you need your own entity at all: a fiscal sponsor lets you operate under an existing charity's exemption while you find out whether the work has legs.