13 November, 2017

A Beginner’s Guide: Understanding 501(c)(3) Nonprofits

There are some basic concepts surrounding nonprofit organizations and what criteria need to be met in order to rightfully maintain charitable status. While individuals are often ready to dive into fundraising and grantmaking, it is always a good idea to be informed about the basics when entering the nonprofit sector.

Here is some of the information you need to know about nonprofits…

What is 501(c)(3) Status?

A nonprofit organization with 501(c)(3) status is considered a tax-exempt, charitable entity by the IRS. By setting up a nonprofit with GVNG, your organization automatically receives 501(c)(3) status. However, it is important to note that 501(c)(3) charitable status is neither permanent, nor guaranteed. In order to maintain tax-exempt status, an organization must be organized and exclusively operated for charitable purposes.

What is Public Benefit?

It is the role and responsibility of nonprofit leaders to ensure that their organizations serve the greater good, and do not intentionally or accidentally create private benefit. Why? Think about it... The government’s purpose is to serve the public— that’s why it’s called the public sector. The reason that the IRS collects taxes in the first place is to further that purpose.

501(c)(3) charities are granted an exemption from paying federal income tax so that all of their resources can go towards serving the public good (i.e. providing meals to the homeless, cleaning up city parks, etc.). These public services are expected to be comparable in value to the amount that a nonprofit would have paid in taxes. In fact, relieving the burdens of government is specifically identified as a charitable activity for 501(c)(3)s. But, nonprofits must ensure that they truly deliver on their mission to improve the collective well being. Otherwise, their tax-exempt status will be revoked. Developing your nonprofit’s work through this lense will not only help you maximize impact, but will also help you avoid sticky compliance issues surrounding private benefit.

What is Charitable Purpose?

How are you going to make the world a better place? Your nonprofit’s contribution to society is known as its charitable purpose. Charitable purposes span a wide range of causes, including (but certainly not limited to) the arts, education, human services, health and the environment. In addition to serving a charitable purpose, your nonprofit may also serve a charitable class. This simply refers to a group of individuals sharing a common need that is eligible to receive assistance from a charitable organization. A few examples include children, the elderly, animals and the environment.

Makes sense, right? Take the cause of “health”, for example. If being related to “health” were sufficient to classify an entity as charitable, a doctor’s office, a pharmaceutical lab or a nutritionist’s practice would all be considered nonprofits. This is where charitable class becomes a necessary criterion for identifying 501(c)(3) charities. By defining cause areas and populations that are eligible to receive charitable assistance, the IRS ensures that only organizations furthering a legitimate charitable purpose (i.e. providing health care services to low-income, uninsured individuals), are awarded and allowed to maintain 501(c)(3) status.

Quick Tips

  • Nonprofits with 501(c)(3) status cannot participate in or contribute money to a political campaign.
  • Nonprofits with 501(c)(3) status are restricted in terms of the extent they can participate in lobbying activities.
  • Nonprofits are not owned by anyone; they are organized only for the public good— not private gain.
  • Nonprofit assets, once obtained, are forever charitable. If a nonprofit dissolves, those funds and assets must be redirected to other charitable purposes.

Want More?

GVNG users with premium features may receive customized advisory services and strategic planning guidance. To get more information, please contact us.

Author: Mary Roach

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