You hear the tax code section "501(c)3" after identifying an organization as a "non-profit", but did you know there are actually 5 distinct types of 501(c)3 organizations? All 501(c)3 organizations must solely have a charitable purpose and have limits on the type of lobbying or political activities they can undertake.
Here's a rundown of the characteristics of some different types of nonprofit organizations and the basics you should know before making any charitable contributions or filing as one of them with the Internal Revenue Service (“IRS”). There are many rules in the Internal Revenue Code that need to be followed for organizations to have tax-exempt status or tax-deductible contributions.
- Publicly supported charity, 509(a)1 -- This includes public charities generally associated with non-profit, 501(c)3 status including educational organizations such as schools, hospitals, religious organizations, and other charities that receive their public support primarily from gifts, grants and contributions from the public.
- Exempt purpose activity-supported charities, 509(a)2 -- Similar to 509(a)1 charities, these include the charities typically associated with non-profit status. Specifically, these organizations usually receive their support from a combination of gifts, fundraising, grants and contributions and fees for their exempt services. Examples are zoos and museums who tend to charge admission.
- Supporting organizations for 509(a)(1) or 509(a)(2) charities, 509(a)3 — these are not publicly supported themselves but are closely tied to non-profits that are publicly supported. Examples of qualifying supporting organizations include certain university or hospital foundations, foundations created to support educational purposes such as libraries or elementary schools, and foundations created to support fire departments and police stations would also fall in this category.
- Public safety charities, 509(a)4 — These charities are exclusively dedicated to testing for public safety. And though not many organizations fit in this category, the ones that do are required to fill out additional paperwork to maintain their status. An example of a public safety charity is the American Fireworks Standards Laboratory.
- Voluntary employees’ beneficiary association, 501(c)4 — These charities provide support to a group of employees in a specific local area.
- Horticultural organizations 501(c)5 — These charities support education regarding plants and agricultural topics.
- Recreational clubs 501(c)7 — These charities tend to be things like country clubs and fraternities.
- Teachers’ retirement fund associations 501(c)11 - These organizations pay retirement benefits to teachers.
- Insurance companies and Telephone companies 501(c)12, 15, 26 and 29 - These organizations provide insurance and utility services at a lower cost to specific communities or individuals.
- Cemetery companies 501(c)13 — These organizations handle all aspects of burial and/or cremation other than running a mortuary.
- Veterans organizations 501(c)19 and 23 — These organizations support veterans of the armed forces and their dependents.
- Private foundation -- If a charitable organization doesn't fit in any of the above categories, it may be a private foundation. Private foundations are typically funded by one source and use its money (i.e. endowment, fund, etc.) to make grants to other charities. Examples include the Coca Cola Foundation and the Bill and Melinda Gates Foundation.
If you would like to start a charitable organization you should make sure you understand the different types of tax-exempt organizations and what you need to do to qualify to qualify for any special federal income tax treatment. It would be wise to speak to an attorney or tax professional who regularly deal with charitable organizations, classifications, and their related tax issues.
Related Resources:
- Strategic Planning for Nonprofit Organizations (FindLaw’s Learn About the Law)
- Top Five Reasons To Incorporate a Nonprofit Organization (FindLaw’s Learn About the Law)
- Nonprofit Organization Law (FindLaw’s Learn About the Law)
