While starting and running a nonprofit can be a rewarding experience, it is also a tricky endeavor. Not-for-profit organizations are subject to many rules and regulations as are not-for-profit businesses. Because non-profit organizations are usually excluded from federal income taxUnited States of America Internal Revenue Service (IRS) take care to be specific and comprehensive in eligible organizations. The result is a long list of types of nonprofits, described by the Internal Revenue Code, that range from very broad to very specialized.
What is a non-profit?
A non-profit organization is a business organized for purposes other than making a profit. Formally, non-profit organization (NPO) is a business that has been granted tax-exempt status by IRS on the basis that it advances a social cause that benefits the public in some way. Not-for-profit organizations are prohibited from distributing the profits they make to anyone or anything other than advancing the organization.
20 Types of non-profit organizations
Not-for-profit organizations serve a variety of causes, from historical preservation to scientific research. While all nonprofits enjoy exemption from federal income taxes, not all types can extend tax deductions to their donors. Note that most of these types of organizations are very specific tax establishments, and are sometimes intended to be formed as subsidiaries of a larger not-for-profit corporation primarily for liability protection purposes. These are 20 common types of nonprofit organizations that you may encounter when starting or developing your own nonprofit
501(c)(1): Organized by act of Congress
These are nonprofit organizations organized by acts of Congress, such as federal credit unions. Because these organizations were founded by federal lawmakers, there is no application process and they do not file tax returns.
501(c)(2): Holder of a title for excluded organizations
The 501(c)(2) organization holds property rights (usually real estate or intellectual property) on behalf of another tax-exempt organization. A 501(c)(2) can only be formed as a subsidiary of another not-for-profit corporation, and they exist to protect the property owner’s organization from some forms of legal liability.
501(c)(3): Charitable organization
Most nonprofits fall under 501(c)(3), such as religion, education, and scientific organizations; public charity, etc. Examples include disease research institutes, churches and synagogues, and traditional charitable organizations. The donations made for this are tax deduction.
501(c)(4): Civil, social league welfare organizations, local employee associations
This nonprofit has fewer limitations when it comes to political activity, such as lobbying or fundraising for candidates. The NRA, ACLU, and Sierra Club are all 501(c)(4) organizations engaged in political activity. 501(c)(3) organizations should not engage in this type of active political participation. Donations to this type of organization are not tax deductible.
501(c)(5): Labor, agricultural and horticultural organizations
The mission of this non-profit organization is to improve working conditions and promote efficiency and quality of work in agriculture. These non-profit organizations can engage in political activities. Like trade unions, 501(c)(5) organizations are funded through membership fee and donations, which are only potentially deductible as business expenses.
501(c)(6): Trade and professional associations
These nonprofit organizations include business leagues (associations of insurance brokers, realtors, accountants, etc.), chambers of commerce, and real estate boards. Their aim is to promote good business conditions, and they can engage in political activity. They are funded by membership dues as well as paid education programs.
501(c)(7): Social and recreational clubs
These are not non-profit organizations, which differ from non-profit organizations in that they are not always concerned with the advancement of social causes or public benefit. These organizations exist for the organization of recreational or outreach activities, such as country clubs and sports leagues.
501(c)(8): Fraternity of society
A 501(c)(8) is a non-profit lodge association (meaning it meets regularly at a designated location) created to pay benefits to its members, such as illness, accident, or life. They include service clubs, bloodline clubs, and secret societies. Donations to 501(c)(8) organizations are not tax-deductible.
501(c)(9): Employee beneficiary association
These non-profit organizations, called voluntary employee benefits associations or VEBA, provide payments to members and their dependents in the event of incapacity to work (due to illness or injury) or other unforeseen events. Members must share common ties, such as being employees of the same employer or members of the same union. It is usually funded by the employer and the employee.
501(c)(10): Domestic fraternity associations and associations
Unlike 501(c)(8) and (9) organizations, these entities do not provide payments to members, they only exist to support external causes favored by members, such as third-party charities.
501(c)(11): Teacher pension fund association
These organizations generate income through contributions paid by public school teachers, tax revenues, and investment income. The funds are used to pay for retired state school teachers.
501(c)(14): State chartered credit unions and joint reserve funds
These organizations provide financial services to members and the wider community, usually at discounted rates. They generate income through standard lending practices and government grants.
501(c)(15): Mutual insurance company association
This non-profit organization offers insurance plans to local members for a fee, usually for property damage, burials, and funerals.
501(c)(16): Cooperative organization to finance plant operations
Under a 501(c)(16) organization, groups of farmers come together to gather resources for agricultural operations, usually to purchase equipment, cultivate crops, tend livestock, or handle shipping and marketing operations.
501(c)(17): Additional unemployment trust benefits
It exists to provide financial support to members — employees of the same employer — who are permanently or temporarily unemployed.
501(c)(18): Employee-funded retirement trust
This section Internal Revenue Code applies to employee-funded retirement trusts created before June 25, 1959. These are funded only by member contributions and are used to pay benefits to them.
501(c)(22): Withdrawal of payment obligations
These organizations are meant to fulfill the employer’s obligations when they withdraw from a multi-employer pension fund. They are financed by the employer themselves.
501(c)(23): Veterans’ organization, before 1880
This designation is solely for veterans’ organizations established before 1880, providing insurance and benefits to members. As with any 501(c)(19) organization, it must have a membership of at least 75% members of the armed forces, past or currently active. Sources of funds come from donations and grants.
501(c)(26): State-sponsored organizations provide health coverage to high-risk individuals
Members in these organizations are usually patients with certain medical risks from pre-existing conditions that may not be insurable through other means. Sources of funds come from donations and grants.
501(c)(27): State-sponsored workers’ compensation reinsurance organization
This not-for-profit organization exists to provide workers’ compensation insurance to member organizations. They are funded by grants and member dues.
501(c) other organizations
There are nine other 501(c) organizations that are specific to different laws (such as 501(c)(24), which are designated for trusts created under section 4049 of the Employee Retirement Income Guarantee Act of 1974) or created for groups certain people (such as 501(c)(21), for a trust that benefits people with black lungs, or a 501(c)(28), which is a Railroad Retirement Board trust).
Last thought
Organizing your business as a nonprofit may be beneficial if your goal is to advance social good or public benefit. Perhaps you hope to sell a product with the aim of using the funds to support some important cause.
Given the wide range of options available, choosing which type of tax-exempt status to apply when forming your nonprofit can seem like a daunting task. Each prospective nonprofit founder should consult with an experienced nonprofit attorney or relevant accounting professional for guidance through the process. This way, you can avoid choosing the wrong format for your small nonprofit business and risk losing crucial ones tax free status.