Starting a nonprofit in the U.S. can be a complex process, especially when it comes to understanding the various types of organizations recognized by the IRS. Many aspiring founders often feel confused by the different classifications and which one best fits their mission. Whether you are looking to start a charity, a social club, or an advocacy group, selecting the wrong type of nonprofit can lead to unexpected tax liabilities and legal issues down the road.
The IRS code outlines numerous classifications, each with its own rules, benefits, and restrictions. If your organization is categorized incorrectly, it could limit your ability to fundraise, lobby, or receive tax exemptions, potentially jeopardizing your goals.
In this guide, we will break down the different types of non-profit organizations in the US according to the IRS code, helping you understand which classification aligns with your organization’s purpose. By the end of this article, you will have the knowledge needed to make informed decisions, ensuring that your nonprofit starts on the right path with the IRS. Below are the different types of nonprofits you can consider in the U.S.
TYPES OF NON-PROFIT ORGANIZATIONS IN THE U.S
1. 501(c)(3) Organizations: 501(c)(3) non-profits are the most common type of tax-exempt organizations in the U.S. They are typically established for charitable, religious, educational, scientific, or literary purposes. These organizations must operate exclusively for one or more of these purposes, and any profits generated must be reinvested in the organization’s mission rather than distributed to private shareholders or individuals. Examples of such non-profits include churches, educational institutions, hospitals, and charities like the Red Cross. Some key features of these organizations are as follows:
a. Donations to 501(c)(3) organizations are tax-deductible for donors, providing an incentive for fundraising.
b. These organizations are prohibited from participating in political campaigns or substantial lobbying efforts.
2. IRC 501(c)(4) Organizations: 501(c)(4) organizations are classified as social welfare organizations. Their primary goal is to promote the general welfare of the community, which includes engaging in advocacy, lobbying, and certain political activities. While donations to 501(c)(4) organizations are not tax-deductible, these organizations have more flexibility than 501(c)(3) organizations when it comes to political engagement. Examples of 501(c)(4) organizations include advocacy groups, civic leagues, and entities like the American Association of Retired Persons (AARP) and the Sierra Club. Some key features of these organizations include, but are not limited to, the following:
a. They can engage in unlimited lobbying activities, as long as they pertain to their social welfare mission.
b. They can also participate in political campaigns, although this cannot be their primary activity.
c. Donations are not tax-deductible, but the organization itself remains tax-exempt.
3. IRC 501(c)(6) Organizations: 501(c)(6) organizations encompass business leagues, chambers of commerce, real estate boards, and trade associations. Their main goal is to improve business conditions within one or more industries, rather than to engage in profit-making activities. Below are some key characteristics of these organizations:
a. Organizations support their members by promoting industry standards, offering networking opportunities, and advocating for favorable regulations or policies.
b.They may also participate in lobbying efforts that benefit their members.
c. While membership dues are typically deductible as business expenses, donations are not tax-deductible for charitable purposes.
Some examples of these organizations include the American Bar Association, chambers of commerce, and the National Association of Realtors.
4. IRC 501(c)(7) Organizations: 501(c)(7) organizations are social and recreational clubs established for pleasure, recreation, and other non-profit purposes. These nonprofits are membership-based and primarily focus on providing social and recreational activities for their members rather than the general public. The income of a 501(c)(7) organization must mainly come from membership fees, dues, and related activities. Non-member income is limited, and donations to these organizations are not tax-deductible. Additionally, they are generally prohibited from engaging in political activities. While these clubs are typically exempt from federal income taxes, they must still file Form 990 to maintain their tax-exempt status. Examples include country clubs, hobby groups, and sports clubs., and sports clubs.
5. IRC 501(c)(8) and 501(c)(10) Organizations: 501(c)(8) and 501(c)(10) organizations are fraternal societies that operate under a lodge system, providing benefits to their members and beneficiaries. Although both types are fraternal, their purposes differ significantly.
501(c)(8) organizations are fraternal beneficiary societies that offer insurance or similar benefits to their members. In contrast, 501(c)(10) organizations are domestic fraternal societies that do not provide insurance benefits but may engage in religious, charitable, or educational activities.
Examples of these organizations include the Knights of Columbus (501(c)(8)) and Masonic lodges (501(c)(10)). Some key features of these organizations include:
a. These organizations operate on a membership basis and are structured under a lodge system with a representative form of government.
b. 501(c)(8) organizations are permitted to provide members with benefits such as life, sickness, or accident coverage.
c. Generally, donations to these organizations are not tax-deductible.
6. IRC 501(c)(13) Organizations: 501(c)(13) organizations are cemetery companies that are created and operated exclusively for the benefit of their members or the public, to provide a final resting place for deceased individuals. These organizations can be either for the burial of human bodies or for cremation. Examples include non-profit cemetery associations and memorial societies. Some of the basic Features of these organizations include the following:
a. The income generated by 501(c) (13) organizations (from services such as burial plots) is generally tax-exempt, provided that it is used for the care, maintenance, and upkeep of the cemetery.
b. Donations to these organizations may be tax-deductible, depending on whether they are for the perpetual care of the cemetery.
c. They must still file Form 990 with the IRS to retain their tax-exempt status.
Other IRC 501(c) Organizations
Beyond the well-known classifications, the IRS code recognizes several other specialized types of 501(c) organizations that serve different purposes. These include but are not limited to:
a. IRC 501(c)(5) Labor, Agricultural, and Horticultural Organizations: These organizations work to improve the conditions of workers in industries such as labor unions and farming associations.
IRC 501(c)(9) Voluntary Employees’ Beneficiary Associations (VEBAs): These are nonprofit entities created to provide employee benefits such as life, health, and accident insurance. Each of these organizations serves a unique role in society, often focusing on specific professional or economic sectors. They enjoy tax-exempt status, but the rules around donations and activities vary based on their designation. Examples include labor unions, farm cooperatives, and employee benefit trusts.
CONCLUSION
Understanding the different types of nonprofits under the IRS code is essential for choosing the right structure that aligns with your organization’s mission and goals. Whether you’re planning to start a charity, a social club, or a business league, selecting the correct IRS classification will not only help you comply with regulations but also optimize your fundraising and operational strategies. Each type of nonprofit has its own set of requirements and advantages, making it crucial to get the right guidance from the start.
If you are looking to register your nonprofit or need expert advice on which type is right for your organization, we are here to help. Our team specializes in guiding individuals and organizations through the nonprofit registration process, ensuring compliance with IRS regulations, and maximizing the benefits of tax-exempt status. Contact us through the Whatsapp icon on this page or HERE for personalized assistance and start your journey to making a meaningful impact globally.
