We often hear the terms “nonprofit” and “501(c)3” being used interchangeably leading one to believe that they mean the same thing….but they don’t.
Just because you’re a “nonprofit” does not mean that you automatically get a “501(c)3” designation - also known as IRS Tax-Exempt Status.
This federal tax status does two primary things: (1) Eliminates federal income tax liabilities for your nonprofit, and (2) Allows your corporate or individual donors (including you as the founder) to write off donations on their personal taxes, which can significantly lower their tax bill to the IRS.
Let's dig a bit deeper into the difference between "nonprofit" and "501(c)3".
Watch this video to learn more.
So, the primary difference is:
- "Nonprofit" means you have filed Articles of Incorporation for a Nonprofit Corporation in your state - versus filing a for profit entity such as an LLC or "C-Corporation"
- 501(c)3 refers to the section of Internal Revenue Code granting tax-exempt status through the IRS, which eliminates federal income tax, and makes donations tax-deductible
Let’s dive into more detail…
What is a "Nonprofit"?
The term “nonprofit” refers to an organization that exists solely to benefit society through charitable activities rather than provide financial benefit to a particular corporation, individual or entity.
Nonprofits can operate under different business formats depending on your state. Here’s a few examples of how you can set up your nonprofit:
- Nonprofit corporation (in Virginia, the entity type is "non-stock corporation")
- Unincorporated Association
- Charitable Trust
These will vary depending on your state, but you can get the details on your options on your Secretary of State’s website.
Most nonprofits file as a “nonprofit corporation” which requires them to file “Articles of Incorporation” which is also required by the IRS to apply for 501(c)3 tax-exempt status.
What is a 501(c)3?
The actual numbers and letter making up the term “501(c)3” refer to the specific tax-exemption status in the Internal Revenue Code.
Nonprofits have to apply for this and it’s bestowed upon your organization when the IRS determines that the nonprofit corporation meets specific requirements and shall NOT be subject to taxation because of the benefit it provides to society through its “exempt” or “charitable” activities.
The Bottom Line: Advantages of Getting 501(c)3
The #1 advantage of obtaining a 501(c)3 for your nonprofit is the ability to offer tax-deductibility for donations from individuals and corporations, so any person or corporation who contributes to a 501(c)3 nonprofit may write off the amount of the donation from the “top line” of their income. This is incredibly attractive to donors, and, quite honestly, critical for running a successful nonprofit.
If you’d like to learn more about how to start a 501(c)3 nonprofit, click here to get our Email Bootcamp or click here to Book a No-Cost Nonprofit Strategy Session.
I hope this clarifies any questions about the differences and opportunities around a “nonprofit” and a “501(c)3 so you know what works best for you.
Cheers to your mission,
Jacqui Long | InstantNonprofit