A common misunderstanding is that nonprofit corporations and 501(c)(3) are the same. Although they are usually used interchangeably, these two words have precise meanings that set them apart.
Typically, a 501(c)(3) is a type of nonprofit corporation that has been exempted from tax by the IRS. However, this does not mean that all nonprofit corporations qualify for the 501(c)(3) status.
This confusion has led to many organizations receiving penalties and fines. In this article, we will look at the differences between a nonprofit corporation and 501(c)(3) and ways for obtaining tax-exempt status from IRS.
What is a 501(c)(3)?
501(C)(3) is a section of the Internal Revenue Service (IRS) code that outlines the requirements for organizations to qualify for tax-exempt. Nonprofit organizations created for charitable purposes are usually granted the 501(c)(3) status, which exempts them from federal income tax.
A nonprofit with the 501(c)(3) status is required to operate exclusively for charity, religion, science, education, or literary purposes. It is supposed to use the money they save from tax exemption to advance their cause and benefit the community.
This non-profit is not required to intervene or participate in any political campaign or in lobbying to pass or oppose proposed laws. Also, its net earnings should not benefit anyone with a private interest in it.
Other than charities, other groups that can obtain this status include charities, schools, amateur sports organizations, and houses of worship. These groups are highly monitored by the Internal Revenue Service for compliance.
Under the 501(c)(3), the IRS lets donors take tax deductions for contributions made through cash, goods, or other assets.
To form a nonprofit organization as 501(c)(3), you need to form a nonprofit corporation under your state laws. Make sure that you describe your company as a nonprofit under your articles of incorporation. You can then apply for the 501(c)(3) status with the IRS.
While this is the easiest way to get the 501(c)(3), it is not the only way. For instance, in some states, organizations with the 501(c)(3) status can apply for the exemption from the state-level taxes. In other states, the organizations need to get the IRS’s designation before they can get the tax-exempt status.
What is a Nonprofit Corporation?
A nonprofit corporation is an entity that is committed to benefiting the public. As the name suggests, this organization is usually created for a nonprofit purpose. However, this does not mean that they don’t make profits through their business activities.
Most nonprofit corporations make profits, which they invest in their cause, and this is what differentiates them from the standard for-profit corporations. To establish a nonprofit corporation, you can hire online legal services or a business law attorney who is licensed in your state. Alternatively, you can form your nonprofit incorporation service by yourself.
It is advisable to check with the state where your corporation will be incorporated. You must apply for a certificate of authority from that state.
What is the Difference Between 501 (c)(3) vs.
The main difference between 501(c)(3) and a nonprofit corporation is tax exemption. A great misconception is that all nonprofit corporations have the 501(c)(3) status. While being a nonprofit corporation makes it easy to gain this tax exemption, it is important to understand that not all nonprofit corporations are qualified for it.
Forming a nonprofit corporation does not automatically exempt you from paying income taxes. You need to prove to the IRS that you qualify for the tax exemption status by filing Form 990. This is a document of the annual financial return of a 501(c)(3) organization, which must be made available to the public each year.
Unlike a standard nonprofit corporation, a 501(c)(3) organization needs to keep its records legally accessible to the public for purposes of transparency and accountability. This is especially important to donors.
Another restriction for companies that qualify as nonprofit corporations is that they cannot intervene or even participate in any political campaign. It cannot campaign for or against a political or public office candidate.
The other limitation is on the number of donations they can spend on lobbying activities to the government. According to IRS Publication 557, these organizations can only spend on lobbying an amount that is insubstantial to their budget.
How to Apply for the 501(c)(3) Status
There are several options available when it comes to applying for the 501(c)(3) tax-exempt status. For a nonprofit corporation that wants to get tax-exempt at the federal level, you will have to apply for a federal tax ID number, which is also referred to as Employer’s Identification Number (EIN). This number identifies your entity as a taxpayer.
You will then need to make an application for the 501(c)(3) and attach the exact copies of the formation documents for your organizations. If you have been running your organization for less than three years, then you are required to provide the IRS with various documents. This includes the current year’s financial statement that shows comprehensive details of your revenue sources and expenses.
Organizations that have been around for more than three years should provide financial statements for the last three years. You will also need to provide projected budgets for the following two years.
Before filling the actual 501(c)(3) form, you will be required to fill out the IRS Form 8718 and attach it to your application. You also need to include a money order or check that covers the Exempt Organization Determination fee.
You also need to describe your activities for the IRS to determine if you qualify for the tax-exempt status. You should provide detailed information on the procedures, methods, and standards of carrying out your activities. The IRS can turn down your 501(c)(3) application if you don’t provide adequate information or a complete application.
Once you are done, you can now make the 501(c)(3) application. This is also referred to as IRS Form 1023, which is available on the IRS website. If you find that the 501(c)(3) application is daunting, you can opt to hire an attorney to help you make the application.
However, it is important to note that this process can be costly. Alternatively, you can hire a professional business service like LegalZoom, to help you apply for the 501(c)(3). For $595, this business formation company will help your organization get tax-exempt status
As we have seen, tax exemption is the main difference between nonprofit corporations and 501(c)(3) organizations. While most nonprofit corporations receive tax-exemption that lets donors get a tax write-off, not all of them are eligible for this status from the IRS. With this information, we hope that you will find it easy to form a nonprofit corporation or tax-exempt nonprofit corporation.