Louisiana Institute of Arts & Humanities

No matter what your mission, forming a nonprofit doesn’t automatically exempt the organization from paying income tax. You have to prove to the IRS that you qualify for one of the 501(c) classes to do that. Take charity, for instance. According to Publication 557, to become a 501(c)3 exempt charitable group, you have to file Form 1023 with the IRS, or 1023-EZ if you’re a small organization. You have to do this online, including added documentation:

• Your organization’s employer identification number (EIN), which identifies your group as a taxpayer, like an individual’s Social Security number
• Your articles of incorporation or other organizing documents
• Your bylaws
• A description of your activities, so the IRS can decide if you meet the 501(c)3 standard
• Financial information

If you don’t provide a complete application or you give insufficient information, the IRS can turn you down. For example, the description of your activities must go into detail: standards, procedures and methods for carrying out your mission, expected sources of funding and what you expect to spend money on. The IRS needs that information to decide if you really qualify as a 501(c)3.

Another alternative, Ioby says, is to look for a sponsor who already has 501(c)3 status. By affiliating with them, you can gain the benefits of their exempt status, even if you haven’t incorporated. Some exempt groups are designed to offer sponsorship to as many nonprofits as possible, while others do it for groups whose purposes align with their own.

A major limitation on the 501(c)3 charitable groups is that they can’t spend donations to lobby the government, unless it’s an insubstantial amount of their budget, as IRS Publication 557 says. A church or a secular charity can lose its exempt status if they spend too much. They also can’t campaign for or against a political candidate. That’s not true of other 501(c) groups.

A 501(c)4 nonprofit, for instance, is a social welfare group. Although social welfare might sound interchangeable with charity, legally the two classes are different. A 501(c)3 group that fights discrimination in its community must abide by the lobbying limits. A 501(c)4 group with the same mission, the IRS says, can make lobbying the government its primary activity and can engage in limited political activity. It may be obligated to tell its members how much of their dues goes to lobbying.

Types of Charitable Organizations

Charitable organizations are nonprofits whose goal is to benefit the general public. Their methods, goals and issues are diverse: fighting sex trafficking, raising funding for colleges and universities, advocating for the mentally ill or fighting against gay marriage. Being charitable doesn’t mean everyone agrees with their agenda, or with the methods they use

Although many nonprofits are also IRS tax-exempt organizations, it’s possible to be a nonprofit and not meet this standard. Nonprofit status is determined by state law, not the IRS. An organization that’s active politically, lobbying government to pass particular legislation, might qualify as a nonprofit. It wouldn’t make the tax-exempt grade with the IRS.

Chambers of Commerce are business groups that work to promote and improve the business environment in their city or county. Even though members expect this to benefit them financially, they’re not actually getting a share of the chamber’s dues. It qualifies as a nonprofit. Boards of trade that self-regulate various industries – ensuring fair treatment for all companies in the industry say – also operate as nonprofits.

Unlike Broadway or Hollywood, community theaters across the country typically operate as nonprofits. The public benefit they provide is the entertainment they create. Local orchestras and ballet companies likewise set themselves up as nonprofits. American museums are nonprofits, too.

In most of the world, museums get their funding from the government. In the U.S.A., museums string together funding sources including government grants, public donations and business activities such as museum restaurants and gift shops. Not having to pay tax on the funds raised is a big help.

Most religious bodies – churches, synagogues, Islamic groups, and so on – qualify as nonprofits. Their purpose usually revolves around their faith. That can include seeking new converts, holding religious ceremonies, counseling people in trouble and sometimes offering financial support to members in need.