4 Types of Non-profit Organizations and How to Choose the Right One

You’re going to start a non-profit. You have a goal and decide that a non-profit business gives you the platform to reach that goal. You're going to build an organization that will improve the world, whether on a local neighborhood scale or even a national or international level.

The big question now is, what kind of non-profit organization structure are you going to choose? Several types of non-profits have various strengths and weaknesses, making them more or less well-suited for different non-profit purposes.  

Before you get started on this non-profit journey, ensure you're fully informed and prepared to make your non-profit dream a reality. 

What is a Non-profit Business?

A non-profit business entity is a business organized to serve the public good. Whereas profit is the primary goal and metric of success for conventional companies, non-profits intend to create a shared benefit for society, whether on a local, national, or international level. 

Instead of releasing excess profits to their owners or corporate shareholders, non-profits use all profits to further their mission. 

Non-profits in the United States are registered with the federal government and regulated according to the IRS tax code, which sets strict and specific requirements for non-profits. 

What are the Benefits of Starting a Non-profit?

If you have a mission and are trying to make a difference in your community, starting a non-profit can be a very effective vehicle for getting started. There are many benefits to having an organized non-profit, and most have to do with saving money or helping your company raise money. 

Here are the most important benefits:

• Non-profit organizations can qualify for tax-exempt status 
• Private donations to some qualifying non-profits are tax-deductible
• Some non-profits can qualify for public or private grants
• A non-profit structure is a separate business entity that can protect founders from liability
• An organized non-profit is built to outlast any one individual's involvement

Tax Exempt Status

Certain types of non-profits meeting the legal requirements can apply for tax-exempt status, which frees them from most tax payment obligations for both federal and state governments. Maintaining this status requires complying with IRS regulations concerning non-profit taxes and reporting non-profit finances yearly on an informational tax return.  

What are the Different Types of Non-profit Organizations?

The most common non-profit organization is a 501(c)(3) organization, named for the section of the IRS code it's established under. A 501(c)(3) is a non-profit established for some social purpose, and that purpose can be religious, charitable, scientific, literary, educational, or related to safety or athletics. 

Most 501(c)(3) organizations can be subdivided into public charities or private foundations. Public charities are supported by the public and receive funding for their work from various sources. On the other hand, private foundations depend on accumulating private wealth and more often serve as a source of financing for any other charitable organization.  

The 501(c)(3) may be the most common, but many types of organizations are established under IRS code section 501. You can find more details under IRS publication 557, but here are the most common ones that might be useful. 

• 501(c)(4): civic leagues or local employee associations
• 501(c)(5): labor unions or agricultural organizations
• 501(c)(6): chambers of commerce and other leagues or boards improving business conditions 
• 501(c)(7): social clubs for recreational purposes
• 501(c)(15): mutual insurance companies
• 501(k): childcare organizations 

What are the Different Business Structures Available for My Charity? 

Now you know how to categorize your business as a non-profit under the tax code. Next, you need to decide how you will organize your non-profit. There are several types of non-profit organization structures, each with benefits and downsides. 

Unincorporated Association

An association is the most informal possible structure for a charity since all you need is an established structure and a group of people with a shared purpose. Associations are simple and easy, as they don't require any extra paperwork, but it's limited in what they can do.

You can get together with like-minded people, plan activities, and even start a bank account to help pay for things. Still, you won't be able to accept tax-deductible donations or qualify for tax-exempt status. An unincorporated association also does not protect you from financial risk.  

Trust

Another possible structure is the charitable trust, which gives you a legal structure to help manage a collection of assets. Trusts qualifying for 501(c)(3) tax-exempt status usually function as private foundations, offering grants to fund other charities doing specific work.

Trusts are helpful for non-profits trying to manage a large estate or endowment. Still, they are not very flexible organizations and must follow stringent regulations, and they also do not protect owners from legal liability.  

Corporation

Most non-profit 501(c)(3) organizations are structured as corporations, creating a separate legal entity and protecting owners and all members from legal liability for the company's work. Having a corporate structure also makes it much easier to apply for tax-exempt status and qualify for grants and tax-deductible donations. 

The downside is that a corporation has many regulations and official procedures a non-profit must comply with, and a corporation is not the most flexible of business entities. 

Many different non-profits under IRS Section 501 are frequently organized as corporations. Again, however, 501(c)(3) is the most common and versatile of non-profit corporation types. 

LLC

A limited liability company, or LLC, is a flexible business entity utilized by many small businesses to protect their assets and save money on income taxes while retaining significant control over business operations. 

LLCs can apply for non-profit status, which is complex and somewhat rare. Normal small business LLCs can be made up of one or more individuals. However, to become an LLC non-profit, every member of the LLC must be a tax-exempt organization. 

Non-profit LLCs are generally only formed when a group of non-profit corporations needs to start an umbrella organization to complete some task together.  

Do I Need to Incorporate My Non-profit?

If you are pooling funds and working with your neighbors or coworkers to meet your community's needs, you may not need to incorporate your non-profit. A group of parents does not need to become a corporation to share their money and put on activities for students, but corporate status would protect them from legal liability. 

As soon as you set your sights any higher for your non-profit, however, you should seriously consider incorporation. The legal structure of a non-profit allows it to carry on its work without depending on an individual personality to make it happen. 

Once your non-profit takes on that corporate structure, it becomes much easier to qualify for tax-exempt status, apply for grants, and hire staff.   

Ready to Start Your Non-profit Business?

Are you ready to decide on your non-profit organization structure? Get started today, making your dreams come true for your community. The world is waiting for your voice. 

If you still need to figure out how to organize your business legally, or you're intimidated by the process involved, feel free to seek help. Consult today with a non-profit expert at 1-800Accountant and find a way to move forward with your vision.