As it is the giving time, I took some time to give a donation through the Friends of Hawaii Charities, Inc. page. As I was going through the process, this triggered my busy-filled brain that I was going to do a series of one-sheets and posts about nonprofits, tax-exemption status, and the meaning of 501(c)(3) . . . Which as you can see I have not done.
So I figured let’s just do a short post on one aspect: namely, terminology and use of phrases of “nonprofit,” “non-profit corporation,” and “501(c)(3)”.
Be Specific: The Importance of the Right Word
Sometimes the “officialness” of a word tends to confuse rather than help. However, for attorneys, especially transactional ones, like myself, we often correct clients that conflate a “corporation” with an “LLC.” They are NOT the same entity. Further, this translates into a shareholder owns stocks/shares in a corporation whereas a member owns membership/ownership interest in their LLC. While this can get confusing to the average businessperson, we attorneys use it to understand what type of situation we are facing for the purposes of ownership, rights, obligations, taxes, etc.
So this brings me to the point of this post. I hear many times people use the word “nonprofit” to mean the same thing as “501(c)(3)” and vice versa. While a 501(c)(3) is a nonprofit, not all nonprofits are 501(c)(3) organizations. (If you remember nothing else of this post, just remember that sentence!)
What is a Nonprofit?
Many people think that “nonprofit” means that the organization does not make money. While, in a sense true, that does not paint the whole picture. Like many lay people’s interpretation of the mechanics of law that is oversimplified. The designation of being a nonprofit does NOT mean that the organization does not intend to make a profit. What it means is that the organization has no owners (like shareholders or members of for-profit corporations or LLCs) and that the revenues earned by the organization do not inure to any particular owner. In fact, there are some large revenue-generating nonprofit organizations out there, and one has had some headlines recently is the National Football League (NFL).
Yes, the NFL is a nonprofit; specifically, under the US Tax Code, it is a 501(c)(6). I will get to the 501(c) thing in a minute. I’d like to finish this thought on “nonprofit” before segueing to the 501(c). Because business entity formation happens at the state-level (here in Hawaii you go through the Department of Commerce and Consumer Affairs, and in other states through the secretary of state), nonprofits first step toward 501(c)(3) status is to become a nonprofit corporation.
At that point, after your Articles of Incorporation are filed, you have a non-profit corporation in your state, BUT you are NOT a 501(c) tax-exempt nonprofit organization.
What are 501(c)s? and Specifically What is a 501(c)(3)?
After you have a non-profit corporation most organizations try to determine whether or not to seek further 501(c) status due to their purpose. Notice that I mentioned that the NFL is a 501(c)(6), which is a Business League, but in total there are about 29 different types of 501(c)s of varying use. The most well-known is what everyone thinks of as a nonprofit, which is an organization organized for charitable (or similar purposes) and has 501(c)(3) status.
If the nonprofit corporation has a charitable purpose, its board of directors will seek 501(c)(3) status form the IRS. This tax-exempt status confers a benefit to people who donate money to the organization. If you look at the website that I made a donation to this is the language they use:
Your donation is made to Friends of Hawaii Charities and is tax-deductible because Friends of Hawaii Charities is a 501(c)(3) tax-exempt charitable organization.
For charitable organizations, that is the key feature of a 501(c)(3) tax-exempt status, allowing the donors to get a tax deduction. To receive this special status the nonprofit corporation has to meet certain criteria, and even after it gets its 501(c)(3) status the organization needs to abide by standards set out in the tax code. For example, 501(c)(3) organizations cannot support political candidates and conduct extensive lobbying whereas the 501(c)(4), civic leagues, aka “Super PACS,” are not barred from these activities (yet).
Last Word: Know the Terms
I hope this clears the confusion when you use the words “nonprofit” and “501(c)(3)”. Nonprofit is just a general catchall and consider the fact that the term can just as easily apply to a casual association as well as a formal organization (i.e. one that has filed Articles of Incorporation to become a nonprofit corporation). Then, you take your non-profit corporation and apply for 501(c)(3) tax-exempt status. If that does not help, as always seek an attorney or professional and they may explain it better than me.
P.S. If you are feeling giving, be sure to check out the Friends of Hawaii, Inc. site and give to a Hawaii nonprofit through Friends of Hawaii, Inc., which is a 501(c)(3) charitable organization!