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  • Marlene

Navigating Non-Profits: Non Profit Corporation vs. 501c3 Status

When considering forming a non-profit there is a lot to navigate and trying to read about the process can be dizzying. One of the most confusing aspects is understanding the difference between a “non-profit” and “501c3.”  So we’re here to help break it down for you. 

What is A “Non-Profit?"

The term “non-profit” typically refers to a non-profit corporation formed with the applicable state of formation. It can also refer to other types of legal structures, but a non-profit corporation is the most standard structure. If you are interested in starting an organization in Pennsylvania, that means forming a non-profit corporation with the Pennsylvania Department of State. Non-profit corporations are formed by filing what are referred to as articles of incorporation. This document lays out the name of the corporation, the registered office address, the purpose of the organization, the names of the incorporators (these do not have to be the board members, it can also be an attorney hired to file the document,) and the effective date. If you want the non-profit corporation to be able to get 501c3 status (explained more below) then they also need to contain certain language around dissolution, non-lobbying, no dividends or payments to board members, and other specific requirements. 

After filing the articles of incorporation, you will also need an employer identification number (EIN), board of directors, bylaws, and a conflict of interest policy (recommended but not required if you do not go for 501c3 status), and need to have a formal meeting to adopt the bylaws, elect the board of directors, and adopt any other resolutions and policies. Once you have a non-profit corporation you have protection from personal liability (only the corporation’s assets are at risk) and you can operate for your non-profit purpose under state law and make sure that the funds generated go to the organization’s purpose. However, while there are less stringent requirements to just be a non-profit corporation vs a non-profit corporation with 501(c)(3) status, it also means that by just being a non-profit corporation you are not exempt from federal income tax and you cannot accept tax deductible donations.

What is 501(c)(3) Status

501(c)(3) status is a separate Federal level tax exemption and therefore is a separate application and process from just forming a non-profit corporation. 501(c)(3) status refers to a federal status granted to a non-profit corporation (or other permitted entity) that allows that organization to be exempt from federal income tax (for its donations, not from withholding from employee wages) and to have its donations tax-deductible to the donor. In order to obtain 501(c)(3) status a non-profit corporation must apply for status with the IRS using Form 1023 or 1023-EZ (depending which option the organization qualifies under) and ensure that its purpose and operations fall under 501(c)(3) status. So generally, not all non-profits are 501(c)(3)s but typically all 501(c)(3)s are non-profits. 

501(c)(3) status is one of several types of tax exempt status that a nonprofit corporation can choose from, but it is often the most common for charitable, educational, religious, or scientific organizations. Because 501(c)(3) status comes with tax exemption and deductibility privileges, it has strict requirements for how the organization must operate and it is important for a non-profit corporation to familiarize themselves with these requirements before electing status. It also requires a specific annual tax filing called a 990 and much more transparency as to organizational operations. 

Outside of the tax benefits of electing 501(c)(3) status, another benefit is that oftentimes public or private grants require an organization to be a 501(c)(3) in order to receive funding. Therefore, by having 501(c)(3) status, an organization can have more access to funding opportunities. 

If you are thinking about creating an organization or group designed to do good, then understanding the non-profit and 501(c)(3) process is key. A lawyer can help advise on how to best begin the formation with the state and then apply for 501(c)(3) status and discuss all the considerations and options before moving forward. They can also help you explore if fiscal sponsorship may make the most sense. Fiscal sponsorship is where an unincorporated or incorporated non-profit group or corporation can piggy back off of the 501(c)(3) status of another non-profit in order to reduce their own compliance requirements while getting the benefits of grants and opportunities reserved for 501(c)(3)s. Read more about fiscal sponsorship in our blog post on the topic

We hope this helps you better understand the differences in these terms and don’t hesitate to reach out to us or another attorney if you want more information on forming a non-profit.  Also check out our resource on operating a strong nonprofit with 501(c)(3) status.

DISCLAIMER: This blog post is meant for informational purposes only and does not constitute specific legal advice or create an attorney-client relationship. Readers should discuss their specific situation with an attorney.

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