American Cancer Society, Habitat for Humanity, United Way, Boy and Girl Scouts of America, and PBS are just some of the popular non-profit organizations that have changed their communities for the better. Although not all nonprofits are so well known, all are established out of a personal passion to serve and help others.

However being servant-hearted alone is not what defines a nonprofit organization. An official nonprofit can be identified by two characteristics:

1. Tax-exempt status granted by the Internal Revenue Service for offering services or products for the public benefit (only available for incorporated organizations).
2. An absence of shareholders. Instead of profit being divided among business partners, profits earned in excess of standard operating costs are reinvested into the mission of the nonprofit.

The IRS currently grants 501(c)(3) tax-exempt status to organizations that further religious, scientific, charitable, educational, literary, public safety or cruelty prevention causes. Donations made to such organizations are tax deductible for individuals and businesses, and the nonprofits receiving these donations pay no income tax on these donations or any financial incentives gained through fundraising.

Groups that are tax-exempt under tax code 501(c)(3) for providing public benefit are also called “public charities”. The National Taxonomy of Exempt Entities has classified these charities into 645 categories in 8 primary groups: human service, art, education, health, community and civil rights, religion, environmental and animal protection, and international development and human rights.

Public and private foundations can also be classified as 501(c)(3) organizations. Foundations are established as nonprofit corporations or charitable trusts, and they exist to provide financial support to organizations, institutions, or individuals for scientific, educational, cultural, religious or other charitable purposes. Foundations are not attached to any government body, and therefore public foundations rely on other foundations, individuals, and government agencies for funding. Private foundations are funded largely through a family, individual, or corporation.

If you have noticed a need in your community that has inspired you to take action, forming a nonprofit organization may be the perfect option for you, but don’t try to do it alone. As a tax-exempt organization, your nonprofit will require excellent bookkeeping and accounting support. We would love to be on your team. Contact us today for more information on how we can help establish your nonprofit on a solid foundation.