A reader of my previous articles on non-profit organizations asked, “Why would someone want to form a non-profit organization and not want to become a 501c3?”

What is a Non-Profit?

Simply put, a non-profit — or not for profit — is an organization that does not distribute its profits to shareholders or owners. Instead of distributing taxable wealth to owners (like a for-profit company), a non-profit uses profits in order to fund its programs and services.

A non-profit can hire employees and a management team and do anything else required to operate. After all such expenses are paid, a non-profit business treats its surplus money differently than a for-profit business.

Instead of paying profits to stockholders, the “extra” money is instead used within the organization to pay for and expand its programs and services.

Non-profit is a legal status pertaining to how and why an organization is being run. It doesn’t confer tax-exempt status, nor must such an organization necessarily pursue tax-exempt status.

What is a Tax-Exempt Organization?

Tax-exempt is a taxation status. Tax-exempt means that your organization will not pay regular income taxes on monies left over after expenses are paid.

While you may be running a non-profit organization in terms of how you handle “extra” funds, you might or might not have a need to obtain tax-exempt status.

Your organization will be doing things to raise money to afford the products and services you want to offer, and some of that money will be used to pay your employees or marketing or other operational costs. After those things are paid, you have a profit.

Do you want that profit to be taxed, or do you want that profit to be tax-exempt?

If you want the Internal Revenue Service to exempt your organization from paying the same taxes as other businesses, you must seek approval for one of the many tax-exempt statuses available. The most commonly known tax-exempt status is 501c3.

You apply for 501c3 status with the IRS. If approved, your organization will be tax-exempt. As I explained in Now You’re Ready for Tax-Exempt Status, having a tax-exempt status does not mean that you don’t have to file with the IRS. You will have to file, and you will have paperwork.

Do I Need Both Non-Profit and Tax-Exempt Status?

Again, your organization can be non-profit and tax-exempt, or it can be non-profit and not tax-exempt.

You will have to weigh the costs versus the benefits against the objectives of your organization. These are not decisions to be made lightly. However, these decisions can be changed as your organization grows and perhaps changes some of its objectives.

Now that you have written your organization’s business plan, you have a clear idea of how you’re going to accomplish the goals of your non-profit.  You are ready to apply to the IRS for tax-exempt status.

Remember that tax-exempt and non-profit are not interchangeable.

Non-Profit is Not Tax-Exempt

Non-profit means that your organization uses any monies it raises to fund the cause of the organization.  At the end of the year, you will not be paying out profits or dividends or disbursements to shareholders or owners like a for-profit business.  Any fundraising or donations to the organization are used to run the organization and to expand the organization’s reach.  This is a state-level status.

Tax-exempt is a filing status with the Internal Revenue Service.  This means that you do not have to pay taxes on the activities within the organization.  The idea is that the funding activities are to support the cause of the organization and not for individual profit or gain.

Where to Find IRS Information

You can read about different types of tax-exempt entities in IRS publication 557.  The IRS website has lots of information for tax-exempt entities.  Be sure to look through the Tax Information for Charities and Other Non-Profits page as well.

Another great resource is the IRS publication 4220, which is a great introductory piece on tax-exempt organizations and the things that classify you as tax-exempt.

While you can prepare your application for tax-exempt status yourself, it is not an easy task.  The applications are lengthy, especially for 501 c 3 status, so it is a great idea to enlist the help of a good accountant or someone who is experienced in helping non-profit organizations through this process.

While many organizations exist to help non-profit organizations get through this whole process, keep in mind that they will charge you for those services.  Be sure to ask lots of questions and get a clear explanation of what each service provides and what is the total cost to you.  Then you can choose the services that are right for you and your organization.

When Can I Start Acting Like a Non-Profit?

Your organization can begin conducting its affairs through the non-profit corporation that you set up at the beginning.  It is important, though, to get the process of applying with the IRS started as soon as possible.  The process can take anywhere from 6 weeks to 12 months, depending on how back-logged the IRS is and on how well your application is prepared.  Many applications are rejected on the first filing; that does not mean that you won’t be able to get approved. If your application is rejected, the IRS is usually looking for more information. The rejection letter will detail what is needed to re-apply.

While the application process can be time-consuming and can seem quite detailed, once you have received your approval, your organization can gain many benefits.

Let’s say you have a cause or a calling.

A non-profit corporation is a way that you can make your cause more official, much in the same way that a regular corporation or LLC makes your business official.

Depending on how your cause is to be carried out, you have many options on how to structure your non-profit organization. Some non-profits need to collect and use donated funds towards their purposes, while others may involve no cash whatsoever.

Forming a Non-Profit Organization

Setting up a formal entity is advisable to organizations that will be collecting donations (or any organization that has a potential for liability).

This keeps the charitable revenues separate from things that would not fall into the range of your mission. Like your house payment.

So the first step is to file a non-profit corporation. What a lot of people don’t understand is that filing the non-profit corporation does not completely make you official.

Filing a 501 c 3 Application with the IRS

To really get official, after you file the non-profit corporation, you still need to file an application with the IRS for tax-exempt status. That means that you are asking the IRS for the benefits available for your type of non-profit or tax-exempt organization.

The goal is to set your organization up so that instead of making profits like a for-profit business, your organization is using the monies that it raises towards the mission of the organization. You can still do things like have staff members to run the organization, and the staff members can be paid for their service. You just can’t disperse profits like with a for-profit business. Instead, the profits are put back into the organization and its goals.

Benefits of a 501 c 3 Corporation

Along with not having profits and therefore income taxes, another benefit to being a non-profit is the ability to accept donations. Anyone who donates to your cause can then potentially claim their donations as a write-off on their own taxes, personal or business. That is a great selling point to those who wish to donate to your cause.

Some other benefits are being able to apply for grants from the government, private foundations, or from other for-profit businesses; qualifying for programs with other non-profit organizations set up to help non-profits; and better pricing for many services with discounts available to non-profit organizations.

Of course all of these benefits are not without any strings attached. You will have reports and filings to do with the IRS. You will potentially have regulations and rules to follow. Whenever you apply for benefits with an agency, you are agreeing to follow their guidelines or you will risk losing your benefits.

Corporate Filing and Compliance

Having someone on your team who knows how to keep up with corporate filing and compliance paperwork is a good idea, like an accountant who is experienced in working with non-profits. You don’t want to lose your non-profit status due to some forgotten filing.

While a non-profit organization takes work and planning to find the best path for your cause, it can be a great vehicle for advancing your cause and is very rewarding.

And that’s worth investigating.