Non-Profit & Tax exempt Entities

Different Types

For those with a dream of developing a charity, the convoluted laws surrounding charitable organizations can be daunting. First, there are two aspects of charitable organizations: (1) the type of non-profit organization you will be, (2) and your tax-exempt status. 

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Types of Non-Profit Organizations

Most people have heard of 501(c)(3) organizations. However, there are many more types of non-profit organizations. The following is a list of all the types:

  • 501(c)(1) - Corporations Organized under Act of Congress (including   Federal Credit Unions) 
  • 501(c)(2) - Title Holding Corporation For Exempt Organization
  • 501(c)(3) - Religious, Educational, Charitable, Scientific,   Literary, Testing for Public Safety, to Foster National or International   Amateur Sports Competition, or Prevention of Cruelty to Children or Animals   Organizations
  • 501(c)(4) - Civic Leagues, Social Welfare Organizations, and Local   Associations of Employees 
  • 501(c)(5) - Labor, Agricultural, and Horticultural Organizations
  • 501(c)(6) - Business Leagues, Chambers of Commerce, Real Estate   Boards, etc.
  • 501(c)(7) - Social and Recreational Clubs
  • 501(c)(8) - Fraternal Beneficiary Societies and Associations
  • 501(c)(9) - Voluntary Employees Beneficiary Associations
  • 501(c)(10) - Domestic Fraternal Societies and Associations
  • 501(c)(11) - Teachers' Retirement Fund Associations
  • 501(c)(12) - Benevolent Life Insurance Associations, Mutual Ditch or   Irrigation Companies, Mutual or Cooperative Telephone Companies, etc.
  • 501(c)(13) - Cemetery Companies
  • 501(c)(14) - State-Chartered Credit Unions, Mutual Reserve Funds
  • 501(c)(15) - Mutual Insurance Companies or Associations
  • 501(c)(16) - Cooperative Organizations to Finance Crop Operations
  • 501(c)(17) - Supplemental Unemployment Benefit Trusts
  • 501(c)(18) - Employee Funded Pension Trust (created before June 25,   1959)
  • 501(c)(19) - Post or Organization of Past or Present Members of the   Armed Forces
  • 501(c)(21) - Black Lung Benefit Trusts
  • 501(c)(22) - Withdrawal Liability Payment Fund
  • 501(c)(23) - Veterans' Organization (created before 1880)
  • 501(c)(25) - Title Holding Corporations or Trusts with Multiple   Parent Corporations
  • 501(c)(26) - State-Sponsored Organization Providing Health Coverage   for High-Risk Individuals
  • 501(c)(27) - State-Sponsored Workers' Compensation Reinsurance   Organization
  • 501(c)(28) - National Railroad Retirement Investment Trust
  • 501(c)(29) - CO-OP health insurance issuers

Tax Exempt Status

For charities that want tax deductible contributions, you then must qualify for tax exemption. Once you know the purpose of your nonprofit organization, you then must choose the type of tax-exempt status that best represents your organization’s operational structure. There are two main types of nonprofits: public charities and private foundations. Then, there is a third, less common type of nonprofit called a private operating foundation. The biggest difference between the two main types are that public charities primarily raise funds from the public to operate programs in their area of impact, while private foundations are typically designed to give away funding to other charities or individuals.

Public Charities

A public charity is designed for one purpose – to operate programs directly benefiting the public. As such, the IRS requires public charities to meet this designation in three ways. 

First, the IRS requires that a public charity restrict its activities to that charitable purpose. 

Secondly, public charities must obtain no less than 1/3 of their funding from the public, either individuals or other public charities, as opposed to private foundations, corporations, or major donors. Known as the “public support test”, individuals (small donors giving no more than 2% of the nonprofit’s annual operating income) or public charities donations must comprise no less than 1/3 of the annual operating budget.

Thirdly, in a public charity, individuals related by blood, marriage or business co-ownership must comprise less than 50% of board seats. Additionally, while members of this board may be employed by the organization they govern, there are strict rules that such decisions must be “at arms-length” and without private benefit to insiders. This is the “organizational test” of qualification for status as a public charity.

Private Foundations

Conversely, a private foundation is usually designed for the purpose of financially supporting other public charities, rather than directly operating charitable programs. This comes with some reduced financial benefit to donors, e.g. only up to 30% of annual income is tax-deductible when donated to a private foundation versus up to 50% of income for public charities. There is also a requirement that a minimum 5% of asset holdings are distributed each year. 

Private foundations are allowed to be closely held and closely funded. There are no regulations prohibiting majority control by family members or business partners, nor any requirement of fulfilling a public support test. Additionally, the 5% asset distribution requirement may be fulfilled by self-run programs.

Private Operating Foundations

The third type of charitable organization is the private operating foundation, which is a hybrid of the above two organizational setups. While a private operating foundation can be closely held, and have funding from a limited number of sources, the private operating foundation must operate programs directly benefiting the public and cannot consider giving away funding as a program. In exchange, the private operating foundation allows public charity levels of deductibility for donors. There are relatively few of these types of nonprofit organizations, but they do allow flexibility for closely held nonprofits that want to directly run charitable programs.

General Considerations

All forms of charitable organizations have transparency rules, and a closely held organization is not any guarantee of privacy or lack of accountability with the IRS. The donating public must clearly understand the control and governance mechanisms of the organization. But each nonprofit organizational setup has its benefits and limitations. It’s typically harder for private foundations to raise outside funding because the perception is that the lack of a diversified board gives donors less control over the use and distribution of their donations. Public charities and private operating foundations are held to a strict expectation that their funding be used to run programs directly benefitting the public, with less flexibility.

All-State Solicitation

In addition to tax exempt status, charities need state approval to solicit for donations. We are able to assist you in receiving that approval.

Tax Preparation

Not only do we prepare the documentation and application forms for non-profits, and the documentation necessary for all-state solicitation approval for public charities, but we also prepare the annual tax returns necessary for continued non-profit status.   

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