What is a Nonprofit Organization?
There are many kinds of nonprofits -- the Internal Revenue Code defines more than 25 categories of organizations that are exempt from federal income taxes.  But for most people, a nonprofit refers to what the tax code classifies as a "charitable" or 501(c)(3) organization. 

What separates a charitable organization from other types of tax-exempt organizations is its purpose: it must benefit the broad public interest, not just the interests of its members. It must serve one or more of the following purposes, which come from the IRS: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or the prevention of cruelty to children or animals. See more on the Scope of the Sector page.

Congress and state legislatures have long recognized this special service by making these organizations tax-exempt, which enables them to dedicate their funds to fulfilling their missions. To encourage the American people to make contributions, federal and state governments have allowed taxpayers to deduct charitable contributions when calculating their income taxes.

Charitable organizations receive their tax-exempt status under section 501(c)(3) of the Internal Revenue Code. A group interested in obtaining this designation must submit an application to the Internal Revenue Service that details its charitable purposes, its sources of funding, the members of its board of directors, its bylaws, and other information. (Religious congregations are an exception to these requirements: in keeping with constitutional protections separating church and state, religious congregations automatically receive 501(c)(3) status.) Organizations must file separate forms with their state or local government agencies to be exempt from local property and sales taxes.

Organizations under Section 501(c)(3) generally fall into one of two categories: public charities or private foundations.

  • Generally, a public charity must document that it receives at least one-third of its annual income from the public, a unit of government, or an organization formed to raise money for a specific school, hospital, governmental unit or publicly supported charity; charities can also charge fees for their services.
  • A private foundation derives its primary financial support from the contributions of an individual, family, or corporation. Foundations are subject to substantially more restrictive rules governing their operations, including how much they must distribute for charitable purposes, and their donors receive less favorable tax treatment for donations.

All the topics above, and many others, are covered in extensive detail on the IRS website.

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