Different Types of Non-Profits

The nutshell: Non-Profits explained

The term "nonprofit" simply refers to "not being commercial motivated." To think that non-profits should not make any profits is simply wrong. As a matter of fact, they can, do and should make profits. Important is what is done with those profits and where they came from.

There are three basic types of nonprofit organizations:

  • Informal Nonprofit Organizations
  • Incorporated Nonprofit (Corporation)
  • Tax-Exempt Organization

Informal Nonprofit Organizations

Anybody can form an "informal" nonprofit, simply by getting together with other people to provide support or services to benefit others. We see this all the time - "Save the Trails of Marquette County", "Recycle Otsego County", "Friends of St. Ann". There are no special benefits in being an informal nonprofit, other than personal satisfaction in helping others. However, there may be certain legal liabilities. Informal nonprofit organizations should check with an attorney before starting an informal nonprofit to discuss possible legal liability risks. If you plan to deduct expenses, receive donations, or charge any fees, you also need to talk with a tax accounting professional. Informal nonprofit organizations are not, and cannot be, tax-exempt organizations.

Incorporated Nonprofit Organizations

This type of nonprofit is formed by incorporating in a particular state to form and be recognized as corporation. A corporation takes the place of individual ownership. Just like a for-profit organizations the corporation "owns" itself, and therefore, can own its own property, have its own bank account, take out its own loan, and can continue on its own eve if the founder leaves the organization. One of the major benefits of incorporation is that the corporation takes on legal liability and financial risks so that founders, officers, and board members have little or no liability (with the exception illegal acts, or gross fiscal misconduct). Nonprofit corporations can be classified in many ways, including as a public benefits corporation, public charity, or educational foundation. Nonprofit corporations may be formed to benefit members of an organization (a club, or mutual benefit society) or for some public purpose (such as a disaster relief, social assistance programs, or youth development programs). A nonprofit organization is not automatically tax exempt.

Tax-Exempt Organizations

Nonprofit corporations must file with the IRS as a separate step in order to receive tax exempt status. An organization cannot receive tax exemption unless it has first formed as a corporation with an accepted charitable structure and purpose. Not all nonprofit organizations are eligible for tax exempt status. Only those that meet certain requirements, as defined by the IRS, will receive exempt status. You will need to complete an IRS Form 1023 to apply. The form is long, the process is expensive, and it can take up to one year to receive a decision. Tax-exempt corporations are required to operate their business in certain ways, file a Form 990, and meet other IRS requirements, or risk losing their exemption status.