It’s easier to lump all charities into one heap, when, in reality, there are different types of nonprofits. They cover a broad range of missions, some of which you might not even be aware of, like your child’s daycare center or the local yacht club.
Nonprofits, charitable or not, have proliferated in the last three years. They run in the millions, with volunteers swarming the fields in a vast attempt to secure a better future for a global community. Ideally, of course.
However, beyond the nobility of a social-minded concept, the bureaucratic ropes still hang in place. If you decide to run a nonprofit, you will most likely have to pass the IRS test of honesty. Will your proceeds reach the stated purpose or is the charity only a front to alleviate tax burdens?
In the following article, we are going to reveal and explain the technicalities behind the nonprofit stage.
Definition of IRS-acknowledged Charity, Types of Nonprofits and Tips on How to Build a Startup NPO
What Is a Nonprofit Organization?
We’re all familiar with the term by now. It’s been in existence for decades, and in fashion maybe more recently. A nonprofit, or non-business entity, is a type of organization whose proceeds are NOT distributed among owners and shareholders.
More often than not, it falls within the scope of an NPO (nonprofit organization) to further a social cause, advocate a particular mission, and advance towards charitable purposes.
Types of Nonprofits Organizations
The IRS recognizes 29 different kinds of nonprofit business structures. Most of them are, to one degree or another, tax-exempt. It really depends on the nature and purpose of the nonprofit. They also differ in terms of lobbying methods, limitations, eligibility, requirements, regulations, and contributions which may or may not come as tax deductible.
To properly categorize the various eligible types of nonprofits, the IRS gathered them all under one subcategory of Section 501 (c) of the Internal Revenue Code. The list is alphabet-long. If you can’t recall intersecting paths with nonprofits in your daily life, then you are not aware of the prolific field that is charity business.
For instance, the business league your own affair might belong to could fall under the subcategory 501(c)(6). The bowling club where you spend your Wednesday nights is a 501(c)(7). And, to take the examples further than life, the cemetery where you might have booked a plot of ground in preparation for the hereafter might be a 501(c) (13).
However, the most common type of tax-exempt nonprofit organization is a 501(c)(3). We know it under the name of charity, an organization that works within the scope of the following purposes:
- Testing for public safety.
- International or national amateur sports competitions.
- Animal or children cruelty prevention.
In turn, 501 (c)(3) nonprofits divide into:
- Public Charities: These are organizations whose members usually knock on our doors and ask for donations to support nonprofits such as food banks, theater groups, or low-income housing organizations. They mostly engage in tax-exempt activities, and derive their primary support from the general public, unlike our second subcategory.
- Private Charities: A private foundation is managed by its own trustees and supported by a single-source fund, such as an individual, a group, or a corporation. It doesn’t need public money to survive.
Other Types of Nonprofits in the 501(c) Category
Both public and private charities can apply for all their business or mission-related income to be tax-exempt. However, the government doesn’t do any favors for free. One way or another, you will return the ‘gift’ tenfold. For one, if you’re in a 501 (c)(3) category, you are prohibited from engaging in lobbying activities. Although, that is not an universal rule, as some of the next examples will illustrate.
The goal is in the name. These organizations work in the interest of community welfare. Their members promote improved working conditions and workplace fairness. In design, they’re similar to labor unions. Lobbying is not restricted in this case.
Fraternities, hobby clubs, sports clubs, and other groups created for recreational purposes are all examples of nonprofits that qualify as tax-exempt organizations. Some of the requirements to fulfill in order for a yachting club, for instance, to gain the nonprofits status are:
- Limited membership.
- Recreational activities designed to promote pleasure and further other non-profitable purposes.
- Promoting contact and interaction among its members.
- Financial support must come in the form of membership fees, dues, and assessments.
- Proceeds may not fall into the hands of any individual or group of individuals personally involved in the nonprofit.
A VEBA, or a Voluntary Employee Beneficiary Association, is a type of trust fund that provides employee benefits and is recognized under the US federal tax law as a nonprofit 501(c).
Here are a few of the benefits VEBA members can draw from this type of nonprofit:
- Accident insurance benefits.
- Life insurance benefits.
- Sick leave payments.
- Severance payments.
- Childcare costs.
- Legal services.
- Continuing education or company training.
- Vacation pay.
Past and present members of the US Armed Forces are the primary beneficiaries of this type of nonprofit.
What Is a ‘Feeder Organization’?
As we’re approaching the end of our article, we feel this is high time we dispense with one common self-propelled misunderstanding. If you are running an ordinary business, don’t rub your hands with glee yet thinking you can turn your profits to charities and see that act of generosity boomerang back in the form of relief from tax burdens. The IRS doesn’t deal in karmic rewards.
On the contrary, the government came up with a slightly belittling title – a ‘Feeder Organization’ and a special regulation for those businesses that are still trying to push their ‘proceeds to charities’ case through without actually serving the community.
Under Code Section 502, a business or trade that operates on profit does not qualify for exemption from tax solely on the ground that its proceeds are payable to charity organizations.
How Many Nonprofits Operate in the USA?
According to the National Center for Charitable Statistics, there are an estimated 2,3 million nonprofits in the US alone, with 1,6 million registered with the IRS. If you have a creative idea and decide to start a charity, you’ll have to best the million rest if you want to stand out on the market. After all, even if socially-minded and free of the profit making and tax paying shackles, all types of nonprofits still operate within the confines of a capitalist economy.
Below is a synopsis of tips to follow in order to start your own nonprofit.
- Build up a business plan in which you outline the first steps to take in order to become a nonprofit. Draw up a clear mission statement. ‘Stop world hunger’ or ‘Save the planet’ sound ideal and laudable – if you are running for Miss Universe 2016.
- Do your research and make sure your idea doesn’t collide with another that’s already in existence and scooping out donors. You don’t want to start a redundant mission.
- You may conduct a ‘needs assessment’ to make sure the community in which you plan to operate actually needs your services.
- Your nonprofit is still subjected to the need for finances. Think of financial sources such as donors or sponsors that could provide your startup charity with a first material push.
There are two possibilities. The high number and types of nonprofits in the US that are alive and kicking can either deter your plans to start your own or inspire and encourage your charitable dispositions even more. If successful, at least, you will have the guarantee that the benefits will easily upstage the bureaucratic process and initial efforts.
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