What is the difference between Nonprofit Corporations and a 501(c)?

Not all nonprofits are tax-exempt, and not all tax-exempt organizations are charities. If that sounds confusing, you’ll need to learn the differences among the various types of nonprofit organizations, including those with a 501(c) designation, which provide different benefits and responsibilities, depending on the nonprofits IRS classification.

The first step for becoming a nonprofit organization is to register at the state level as a nonprofit corporation. This requires creating a board of directors and submitting specific paperwork to your secretary of state, including your articles of incorporation. Articles of incorporation include basic information about the organization, such as its purpose, officers and address. The process is simple, can often be done online and usually requires a fee of less than $100. Once an organization receives its nonprofit corporation status, it receives certain benefits from the state, such as not having to pay sales tax or the opportunity to apply for certain types of grants.

Once a business becomes a nonprofit corporation, it can apply for federal tax-exempt status at the federal level. This requires applying for a federal tax ID number, then applying to the Internal Revenue Service for recognition as 501(c), or tax-exempt organization. There more than 50 different 501(c) classifications an organization can receive, depending on its purpose and activities. For example, trade associations receive a 501(c)(6) designation, while community recreation organizations receive a 501(c)(4) designation. While 501(c) organizations receive tax-exemption, meaning they don’t pay taxes on certain types of income, not all receive a charitable status that allows donors to receive a tax write off.

A 501(c)(3) organization starts as a nonprofit corporation, then becomes a federally tax-exempt charity that does not pay income or sales tax, and allows donors to write off contributions. Many for-profit organizations, and some nonprofit organizations, set up related 501(c)(3) organizations to do charitable work. For example, a 501(c)(6) trade organization for accountants might set up a 501(c)(3) nonprofit to collect and disburse funds for scholarships or educational purposes.

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    Common questions for LLC.

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    What is an Advisory Group or committee and do I need one for my nonprofit organization?

    If the governing documents or bylaws of your Nonprofit organization includes a standing committee or advisory group it will be required to appoint voluntary members or your organization to form such advisory group.  An advisory group or standing committee is a group of individuals outside of the board (non officers or directors) who function to advise the board on certain tasks or activities of the organization. They don’t have actual authority nor compromise the organization into business activities, but they make recommendations to the board of directors.

     Do a Nonprofit need an operational budget ? 

    Yes and it is highly recommended to have a rolling forecast set to keep track of your cash inflows and outflows on a monthly basis. With the assistance of a qualified accountant your nonprofit organization’s financial health can be achieved. Contact our partner for a free consultation.


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