What is a Nonprofit?

A nonprofit organization, often referred to as a nonprofit institution, foundation, or non-business entity, exists to advance a specific social cause, advocate for a shared point of view, or provide a public benefit. Unlike traditional businesses that aim to generate profits for owners or shareholders, nonprofits operate with a mission-driven focus.

Nonprofits are granted tax-exempt status by the Internal Revenue Service (IRS) under section 501(c) of the tax code. To qualify, an organization must be dedicated to religious, scientific, charitable, educational, literary, public safety, or cruelty-prevention efforts. Organizations must formally apply for 501(c) status before operating with tax exemptions.

The Definition/Meaning of “Nonprofit”

The term “nonprofit” refers to an organization that does not distribute profits to private individuals or shareholders but instead reinvests any surplus revenue into furthering its mission. This broad category encompasses various types of organizations, from charities to membership-based associations.

While many people use “nonprofit” as a catch-all term, there are actually more than three dozen different types of tax-exempt organizations recognized by Congress, each serving a distinct role in society.

The Different Types of Nonprofit Organizations In The United States

Nonprofits are classified under Section 501(c) of the Internal Revenue Code. The two primary types of nonprofit organizations are:

• Nonprofit Organizations (NPOs): These provide goods and services to benefit the public.
• Not-for-Profit Organizations (NFPOs): These primarily serve a defined group of members rather than the general public.

The most well-known nonprofit classification is 501(c)(3), which covers organizations that operate for charitable, religious, scientific, literary, or educational purposes. However, other nonprofit categories exist, including:

• 501(c)(4): Civic leagues, social welfare organizations, homeowners associations, and volunteer fire departments.
• 501(c)(5): Labor unions and agricultural organizations.
• 501(c)(6): Business leagues, chambers of commerce, and trade associations.
• 501(c)(7): Social and recreational clubs.
• 501(k): Childcare organizations.

Beyond these, the IRS recognizes numerous other classifications, each with its own tax implications and operational guidelines:

• 501(c)(1): Corporations organized under an Act of Congress, such as Federal Credit Unions.
• 501(c)(2): Title-holding corporations for exempt organizations.
• 501(c)(8): Fraternal beneficiary societies and associations.
• 501(c)(9): Voluntary employee beneficiary associations.
• 501(c)(10): Domestic fraternal societies and associations.
• 501(c)(12): Mutual or cooperative telephone companies, mutual ditch or irrigation companies.
• 501(c)(13): Cemetery companies.
• 501(c)(14): State-chartered credit unions and mutual reserve funds.
• 501(c)(15): Mutual insurance companies or associations.
• 501(c)(17): Supplemental unemployment benefit trusts.
• 501(c)(19): Veterans organizations.
• 501(c)(23): Veterans organizations created before 1880.
• 501(c)(26): State-sponsored organizations providing health coverage for high-risk individuals.
• 501(c)(27): State-sponsored workers’ compensation reinsurance organizations.
• 501(c)(29): Qualified nonprofit health insurance issuers.

Each classification specifies the nonprofit’s operational focus, who it serves, and what activities it can engage in. 501(c)(3) public charities and private foundations are the most common nonprofits, while 501(c)(4) and 501(c)(6) organizations often engage in advocacy, lobbying, or professional trade activities.

Understanding these classifications is crucial for organizations seeking tax-exempt status and for individuals or businesses looking to support nonprofits that align with their values and philanthropic goals.

The Difference Between Public Charities and Private Foundations

Organizations classified under 501(c)(3) fall into two main categories:

• Public Charities: These organizations receive funding from a broad range of sources, including individual donations, government grants, and corporate sponsorships. Public charities are often service-oriented, such as food banks, educational programs, or healthcare initiatives. Donations to public charities are typically tax-deductible.
• Private Foundations: Unlike public charities, private foundations are usually funded by a single source, such as a family or corporation, and distribute funds through grants rather than direct services. While donations to private foundations are also tax-deductible, these organizations face stricter regulations, such as limits on direct lobbying activities.

How do you spell “Nonprofit?”

There is often confusion about the correct spelling of the term. You may see it written as “nonprofit,” “non-profit,” or “non profit.” While all versions are commonly used, the most widely accepted spelling in the nonprofit sector and in U.S. legal and academic settings is “nonprofit” as a single word.

How Do I Start A Nonprofit?

Starting a nonprofit requires careful planning, legal compliance, and a clear mission. Before beginning the process, it’s highly recommended to research whether a nonprofit organization already exists that is serving the mission you want to support. Creating multiple organizations with similar goals can increase administrative costs and potentially dilute the impact in that mission area. If an existing nonprofit is already addressing the issue, you may consider:

• Partnering with the organization to strengthen their impact.
• Joining their board, staff, or volunteer team to contribute directly.
• Filling a gap in their services by launching programs or initiatives that they have not yet developed.

If, after thorough research, you determine that a new organization is necessary, the key steps include:

1. Define Your Mission: Establish a clear and compelling purpose for your organization.
2. Create a Business Plan: Outline goals, funding strategies, and operational structures.
3. Form a Board of Directors: Select a group of individuals to oversee governance and decision-making.
4. Incorporate Your Organization: Register your nonprofit as a corporation in your state.
5. Apply for Tax-Exempt Status: Submit IRS Form 1023 (or 1023-EZ for smaller organizations) to obtain 501(c)(3) status.
6. Comply with State & Federal Laws: Ensure proper reporting, fundraising compliance, and financial management.
7. Launch & Operate: Develop programs, raise funds, and start making an impact in your community.

Starting a nonprofit is a rewarding but complex process that requires ongoing commitment. Many founders seek legal and financial advice to ensure their organization operates successfully and remains in good standing with the IRS. If you are considering starting a nonprofit we would advise learning more at the Foundation Center’s GrantSpace to learn if Starting A Nonprofit is Right For You. GrantSpace and the Foundation Center have helpful classes to prepare you and or empower you to make a smart decision.  Their classes can help walk you through best practices and the main first steps in creating a nonprofit. This can include:

• Deciding on if starting a nonprofit is the right choice
• Creating a mission statement
• Developing a business plan
• Building a board
• Incorporating and filing for tax-exempt 501(c)(3) status

 

 

How Many Nonprofits Are In The United States?

How Many Nonprofits Are in the United States?

The nonprofit sector in the United States has experienced significant growth in recent years. There are approximately 2 million registered nonprofit organizations across the country. This expansive sector encompasses a diverse array of entities, including public charities, private foundations, chambers of commerce, fraternal organizations, and civic 

Key Statistics:

• Employment: The nonprofit sector is a major employer, with over 11.4 million individuals working within these organizations. ​

• Volunteerism: Approximately 25% of U.S. adults engage in volunteer activities annually, dedicating their time and skills to support various nonprofit missions.​

Top Websites for Nonprofit Data and Research:

For those seeking comprehensive information and resources on the nonprofit sector, the following websites are invaluable:

1. Candid (candid.org): Formed from the merger of Foundation Center and GuideStar, Candid offers extensive data on nonprofits, foundations, and grants, serving as a central resource for sector insights.​candid.org

2. GuideStar by Candid (guidestar.org): Provides detailed profiles on millions of nonprofit organizations, including financial information, mission statements, and program details.​

3. National Center for Charitable Statistics (NCCS) (nccs.urban.org): A comprehensive repository of data on the U.S. nonprofit sector, offering tools and reports for in-depth analysis.​

4. Charity Navigator (charitynavigator.org): Evaluates nonprofits based on financial health, accountability, and transparency, aiding donors in making informed giving decisions.​

5. Nonprofit Explorer by ProPublica (projects.propublica.org/nonprofits/): Allows users to browse IRS data on tax-exempt organizations, including financial details and executive compensation.​projects.propublica.org

6. National Council of Nonprofits (councilofnonprofits.org): Offers resources, tools, and best practices to help nonprofits navigate challenges and enhance their impact.​

7. Independent Sector (independentsector.org): Provides research, advocacy, and leadership development for nonprofits and foundations, highlighting sector trends and policy issues.​

8. Foundation Directory Online (fconline.foundationcenter.org): A comprehensive database of U.S. grantmakers and their funding activities, facilitating effective grant research.​

9. GrantStation (grantstation.com): Offers up-to-date information on grantmakers and funding opportunities, along with tools for developing grant proposals.​

10. Grants.gov (grants.gov): The official portal for federal grant opportunities, providing access to funding from various U.S. government agencies.​

These platforms serve as essential resources for nonprofit professionals, researchers, and donors, offering data, analysis, and tools to support informed decision-making and effective philanthropy.