Types of Nonprofit: Determining How to Categorize the Different Types of Nonprofits

There are many types of nonprofit but they all share a similar objective. Often referred to as a not-for-profit, charity, or NPO, a nonprofit is an organization that functions to serve the public and further a mission. Rather than generating a profit for shareholders, a nonprofit reinvests all excess revenue into furthering its social, educational, scientific, charitable, or other goals. The form of a nonprofit may vary between organizations, they can operate as a foundation, a charity, an advocacy group, a religious organization, and more. The common characteristics are that nonprofit organizations cannot distribute profits, typically rely on fundraising for income, and are exempt from income tax.

Nonprofits play an important role in society by helping the public to tackle a wide array of humanitarian, social, environmental, and cultural needs. Organizations provide charitable services to the less fortunate, filling gaps that could not be filled by the government or a for-profit business. Charities often contribute to the development of the communities around them. They engage in community-building schemes, provide social services, and work to improve the quality of the lives of individuals. Nonprofits are critical to society and the public, playing a pivotal role in addressing a huge variety of issues across the globe and advocating for positive change.

501(c)(3) Nonprofit Organizations

501(c)(3) charitable organizations are one of the many types of nonprofits. 501(c)(3) refers to a section of the Internal Revenue Code that determines the tax-exempt nature of an organization. Nonprofits receive two distinct benefits when categorized as a 501(c)(3) charitable organization. They are exempt from federal income tax and are able to accept tax-deductible charitable donations. In order for a nonprofit organization to qualify for 501(c)(3) status, it must operate solely for the specific purposes outlined in the tax code.

Forms of 501(c)(3) Organizations: Public Charitable Organizations and Private Foundations

There are two common forms of 501(c)(3) organizations: public charities and private foundations. Here are the key differences:

Public Charities

• A large portion of their income is contributed by the public or the government.
• Actively retain their exempt status by supplying grants, services, or other charitable schemes.
• Benefit from having an expansive foundation of public support.

Private Foundations

• Generally have a single large source of income, such as a family, individual, or corporation.
• Typically issue grants to other organizations in order to conduct indirect charitable activities.
• Have to adhere to stricter rules and regulations surrounding minimum distribution, self-dealing, and specific financial transactions.

Donor Benefits of Nonprofits with Tax-Exempt Status

As mentioned earlier, organizations that comply with section 501(c)(3) of the Internal Revenue Code are exempt from federal income tax and, depending on their location, may also be exempt from certain state and local taxes. These tax benefits extend to most forms of fundraising as long as they align with the charitable nature of the nonprofit. It is not only the charity that benefits from its 501(c)(3) status, donors also receive tax benefits when making a donation to a tax-exempt organization. Individuals are encouraged to support 501(c)(3) organizations by being given the ability to claim deductions on their income tax based on the amount that they have donated.

501(c)(4) Social Welfare Organizations

501(c)(4) is a type of tax-exempt status outlined in the Internal Revenue Code that covers social welfare organizations. 501(c)(4) organizations differ to 501(c)(3) organizations because they are allowed to partake in a limited amount of lobbying and political activity while maintaining their tax-exempt status. The chief purpose of a 501(c)(4) nonprofit is to nurture the welfare of society. They typically do this by providing community improvement schemes, supporting individual well-being, and tackling social issues.

How this Type of Nonprofit can Engage in Political Activity and Lobbying

The following is the extent to which a 501(c)(4) organization is able to engage in political activity and lobbing:

Political Activity

• A 501(c)(4) social welfare organization is able to engage in low levels of political activity but it cannot allow political intervention to supersede its primary purpose.
• This type of organization is able to endorse or withstand political candidates, partake in political advocacy, and involve itself in partisan engagements to a limited extent.

Lobbying

• At federal and state levels, 501(c)(4) organizations are allowed to engage in lobbying.
• There are limitations to the lobbying activity of a 501(c)(4) nonprofit. Lobbying must relate to the social welfare purpose of the organization and there are caps to lobbying expenditure that can threaten the tax-exempt status of the organization if not adhered to.

Tax Implications of 501(c)(4) Organizations

Donors are not eligible to claim deductions on their income tax for contributions to a 501(c)(4) organization but they can typically remain anonymous. 501(c)(4) nonprofits are not held to the same level of donor disclosure as 501(c)(3) organizations. 501(c)(4) organizations may still be subject to unrelated business income tax and must file Form 990 with the IRS annually.

501(c)(6) Business Leagues and Trade Associations

501(c)(6) is a section of the Internal Revenue Code that designates tax-exempt status to business leagues, trade associations, and other similar organizations. The key role of these nonprofits is to help their members to improve business conditions and support business interests. 501(c)(6) organizations are centered on boosting the economic welfare of their members rather than serving a charitable mission.

Membership and Funding of Nonprofits of this Type

Members of a 501(c)(6) nonprofit will typically include businesses and professionals in a specific industry or location, but can vary between organizations. Businesses of varying statures, professionals, and other entities come together to support their shared business interests.

501(c)(6) organizations are generally funded by membership dues, fees, and sometimes revenue from services provided to members. It is also common for this type of nonprofit to receive sponsorship from businesses or individuals that are interested in supporting the sustainability of the represented industry.

Political Activity and Lobbying

Organizations that fall under section 501(c)(6) of the Internal Revenue Code are subject to similar political activity and lobbying regulations to 501(c)(4) nonprofits. They are permitted to engage in political activities without making them the primary purpose of the organization. 501(c)(6) organizations should be careful with contributions to political campaigns and candidates due to the heavily regulated nature of their tax-exempt status.

501(c)(7) Social and Recreational Clubs

Social and recreational clubs can become nonprofit organizations via section 501(c)(7) of the Internal Revenue Code, which grants them tax-exempt status. Clubs of this nature are formed to allow members to indulge in pleasure, recreation, or social activities. Unlike charitable organizations, 501(c)(7) nonprofits focus on providing a venue to accommodate social interaction and hobby-based pursuits. This type of nonprofit is typically supported by a membership scheme that allows associated individuals to contribute revenue to the organization in return for access to its venue and activities.

Membership Requirements

501(c)(7) organizations are held to certain membership regulations. Here are some examples:

• Limited Membership: Social and recreational nonprofits are limited to offering membership to those who share the common recreational interest of the organization. They may also be subject to membership caps and a strict criteria for joining.
• Non-Discrimination: While 501(c)(7) organizations can have a criteria for membership, they are forbidden to discriminate potential members on the basis of race, skin color, or religion. If a club fails to abide by this regulation then it may forfeit its tax-exempt status.
• Organized and Operated for Pleasure: 501(c)(7) nonprofits must remain devoted to their primary purpose of being operated for the pleasure and recreation of their members.

Tax Treatment and Compliance

As with other organizations that fall under section 501(c) of the Internal Revenue Code, 501(c)(7) organizations are exempt from federal income tax. There is potential for nonprofits of this type to be subject to unrelated business income tax and they are required to file Form 990 annually to the IRS.

Other Types of Nonprofit

There are a variety of other types of nonprofits that fall under section 501(c) of the Internal Revenue Code. Below are some common examples and their defining characteristics:

501(c)(5) Labor and Agricultural Organizations

• Include labor unions and agricultural organizations.
• Labor unions represent workers in their fight for improved working conditions, benefits, and pay.
• The well-being of farmers, and their farms, is protected by agricultural organizations. They may also provide agricultural services to their members.
• 501(c)(5) organizations are typically exempt from federal income tax.
• Donations made to a 501(c)(5) organization are not usually tax-deductible.

501(c)(8) and 501(c)(10) Fraternal Organizations

• 501(c)(8) fraternal nonprofits support members by providing insurance and other benefits. They may operate to issue disability benefits, life insurance, or other services to members.
• 501(c)(10) fraternal nonprofits support members by offering them social and recreational services. They do not typically provide insurance benefits and this is what sets them apart from a 501(c)(8) organization.
• Both 501(c)(8) and 501(c)(10) organizations are exempt from federal income tax.
• Donors will not be eligible to claim deductions on their income tax for supporting any organizations that fall into either of these categories.

Religious Organizations

• Typically fall under section 501(c)(3) of the Internal Revenue Code.
• Churches, synagogues, mosques, and other religious buildings can qualify for tax-exempt status.
• They generally engage in worship, other religious activities, and community outreach programs.

Educational Institutions

• Typically fall under section 501(c)(3) of the Internal Revenue Code.
• Universities, schools, colleges, and other education-based institutions can qualify for an exemption to federal income tax.
• These organizations offer formal education and may also issue scholarships, research, and community welfare schemes.

Charitable Organizations

• Typically fall under section 501(c)(3) of the Internal Revenue Code.
• These organizations focus on a mission that can be related to education, the environment, science, or other societal challenges.
• Many different establishments make up the charitable organization category, including food banks, disaster relief services, clinics, and more.

Challenges Faced by Different Types of Nonprofits

The nonprofit sector can be tricky to navigate and organizations that operate within it can face many challenges. These challenges can arise based on various factors but commonly due to the complexities of funding and allocating resources, complying with strict regulations, and striking a balance between the mission of an organization and its management. Here is how different types of nonprofits are affected by these common challenges:

Funding and Resource Allocation

• 501(c)(3) Charitable Organizations: Having a dependency on donations can cause financial instability and this is heightened during times of economic downturn.
• 501(c)(4) Social Welfare Organizations: It can be challenging to attract donors when there is no benefit via tax deductions.
• 501(c)(6) Business Leagues and Trade Associations: Having a diverse group of members means that there are many needs and requirements that a 501(c)(6) organization needs to meet. This can make it extremely difficult to allocate funds appropriately, especially when there are limited resources.
• 501(c)(7) Social and Recreational Clubs: Membership dues and fees can fluctuate heavily throughout the course of a year. This can make it difficult for 501(c)(7) organizations to be financially stable.

Regulatory Compliance

• 501(c)(3) Charitable Organizations: 501(c)(3) organizations have to meet strict financial reporting requirements, maintain transparency, and navigate a set of complex regulations.
• 501(c)(4) Social Welfare Organizations: This type of nonprofit has to be able to find a good balance between appropriate political activity and the maintenance of its tax-exempt status.
• 501(c)(6) Business Leagues and Trade Associations: 501(c)(6) associations must set an acceptable limit to their participation in lobbying in order to satisfy their reporting requirements.
• 501(c)(7) Social and Recreational Clubs: Social and recreational clubs have to carefully ensure that they are abiding by non-discrimination requirements and offering members exclusive benefits.

Balancing Mission and Management

• 501(c)(3) Charitable Organizations: Charitable organizations require effective organizational management as well as a keen focus on the mission of the nonprofit. Finding common ground between these two requirements is not always easy.
• 501(c)(4) Social Welfare Organizations: Managing permissible political activity whilst maintaining emphasis on social welfare is challenging for 501(c)(4) organizations.
• 501(c)(6) Business Leagues and Trade Associations: Managing a 501(c)(6) association effectively and aligning the goals of all of its members simultaneously is not easy to accomplish.
• 501(c)(7) Social and Recreational Clubs: Providing exclusive benefits that will satisfy the needs and preferences of a diverse group of members can be challenging for 501(c)(7) clubs.

The Future of Nonprofit Organizations

Nonprofits must adapt to survive in an ever-evolving technological, social, and economic landscape. As time passes, new trends emerge in the nonprofit sector. Innovations like data-driven decision making and hybrid business models are allowing organizations to cement the certainty of their future. Utilizing analytics and data to make informed decisions helps nonprofits to boost their operational efficiency. Organizations are leaning more toward cross-sector partnerships as they gain a better understanding of the benefits that come with resource pooling and shared expertise. A heavier focus on diversity, equity, and inclusion is promoting a greater influx of ideas in the nonprofit sector and ensuring that the impact of an organization is fair and equitable.

Technology is becoming more accessible around the world and this is placing a greater emphasis on the use of online platforms for fundraising and spreading awareness. Social media can be leveraged to reach large audiences, raise funds, and engage with donors. Online fundraising solutions, such as Paybee, are providing platforms for nonprofits that offer a wide array of useful tools that help organizations to manage donors, generate revenue, and host events. As nonprofits continue to use technology within the sector, data security and privacy becomes a growing concern. Organizations must follow best practices to ensure that they are protecting their donors against the dangers of the digital world.

Society changes on a daily basis and with this comes new societal needs. Successful nonprofits will monitor changing societal needs and adapt to them in order to overcome associated obstacles. Organizations should adopt agile operational models and flexible working environments to guarantee that they can respond quickly to emerging crises, attract the required talent to further their mission, and fulfill changing workforce requirements and expectations. Nonprofits continue to recognize the importance of environmentally conscious practices and how implementing them can help to improve the overall well-being of society. The dynamic future of nonprofit organizations is shaped by the influence of shifting societal needs, technological innovation, and evolving expectations. Adapting to these changes will require a nonprofit to plan strategically and continue to focus on its positive social impact.

FAQs

Q: What is the difference between a nonprofit and a 501(c)(3)?

A: Nonprofit typically refers to the entity, or organization, that was set up with a nonprofit purpose and a mission. 501(c)(3) is used to refer to a nonprofit organization that has been issued a federal income tax exemption under section 501(c)(3) of the Internal Revenue Code. Not all nonprofits are issued the same tax-exempt status and others will fall under different sections of the Internal Revenue Code.

Q: What is the difference between the different types of nonprofits?

A: Many of the differences between the different types of nonprofits have been discussed earlier in this article. Generally a nonprofit is defined by its purpose and therefore its mission. Depending on the nonprofit purpose of an organization it will fall under a specific section of the Internal Revenue Code. This will grant it a tax-exempt status and set it apart from other nonprofits that fall into different categories.

Q: What are the disadvantages of a 501(c)(3) nonprofit?

A: The key disadvantage to falling under section 501(c)(3) of the Internal Revenue Code is that the organization will be subject to strict government oversight. There will be tight regulations and restrictions that a nonprofit in this category will have to adhere to or it could face having its tax-exempt status revoked. However, this government oversight should not be seen as a disadvantage but simply a requirement of being able to function as a nonprofit charitable organization.

Conclusion

Nonprofit organizations are critical to addressing the great deal of issues facing society, such as lack of access to education, low social welfare, and the diminishing rights of workers. They also offer recreational activities to certain groups, allow individuals to practice their religion, and protect business interests. The diverse range of types of nonprofits, such as 501(c)(3) charitable organizations, 501(c)(4) social welfare organizations, 501(c)(6) business leagues and trade associations, and 501(c)(8) fraternal organizations reflect the varying needs of society and how these organizations contribute to their communities.

If you are in the process of establishing a nonprofit organization and determining the category that it falls into, Paybee can offer you support. Their online fundraising platform can assist with revenue generation, accepting payments, donor management, hosting events, and much more! For an all-in-one solution to your nonprofit organization's fundraising needs, contact Paybee and sign up for the demo.