An organization that qualifies as a 501(c)(3) Tax-Exempt Organization is commonly called a charitable organization. The term charitable includes a wide range of activities that go beyond acts of charity. Charitable causes include every gift for a general public use, for the benefit of an indefinite number of people, and designed to benefit them from an educational, religious, moral, physical or social standpoint.
If you have decided to incorporate your non-profit as a public benefit corporation with the ultimate goal of obtaining a 501(c)(3) status and federal tax exemption, please consider the following explanation of one of the terms commonly used in the non-profit lexicon.
The requirements for a federal tax exemption for qualifying as a 501(c)(3) organization are contained in 26 U.S.C. §501(c)(3) state:
“Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”
Although the organizations qualifying under 501(c)(3) are commonly called charitable organizations, that term is a bit misleading. While a charity is designed to provide an act of kindness or other such gift to a person in need, the term “charitable” encompasses actions beyond acts of charity. The word “charitable” includes every gift for a general public use, for the benefit of an indefinite number of people, and designed to benefit them from an educational, religious, moral, physical or social standpoint. So DO NOT rule out your eligibility under 501(c)(3) because your non-profit is not a charity – the statute allows a wide range of non-profits to qualify for the federal tax exemption. Please continue reading with our next blog post entitled Public Benefit Corporations Qualifying Under 501(c)(3): Public Charity vs. Private Foundation.
Types of Charitable Non-Profit Corporations
The two types of charitable non-profit organizations that differ primarily in stated purpose, how their assets can be distributed, and the amount of regulation.
Public Benefit Corporations
– A public benefit corporation may be formed for either a charitable or a public purpose, may not distribute assets to members or directors, and are subject to the most extensive regulation.
– A public benefit corporation may apply for a federal tax exemption as a 501(c)(3). For more information on which public benefit corporations qualify under 501(c)(3), please read our blog post entitled Considering 501(c)(3)? Charity vs. Charitable.
Mutual Benefit Corporations
– A mutual benefit corporation may be formed for any lawful purpose, may distribute assets to members or directors upon dissolution and are subject to less extensive regulation than a public benefit corporation.
– A corporation with a public benefit or charitable purpose may file as a mutual benefit corporation to avoid the amount of regulation a public benefit corporation is subject to, but only if the corporations’ assets are not dedicated to a charitable, religious or public purpose. Additionally, if a non-profit corporation wishes to file for a 501(c)(3) tax exemption, they are not eligible as a mutual benefit corporation.