A non-profit may be a tax-exempt organization (i.e. a business that has been granted tax-exempt status by the Internal Revenue Service and/or the applicable state) that serves the public interest by providing goods and/or services without pursuing profits for private use. So a non-profit corporation is a certain type of corporation that has been organized to meet specific Internal Revenue Service (“IRS”) and state approved tax-exempt purposes. Tax-exempt status may provide certain benefits such as sales taxes exemption, property taxes exemption, and the organization is not required to pay taxes on its income and the money it receives in connection with its exempt transactions. But donations made to a nonprofit organization are usually deductible for the persons or businesses that make them. The IRS recognizes multiple types of organizations that may qualify for tax-exempt status. Generally, the purpose of this type of organization must be charitable (to benefit the public, a specific group of individuals, or the members of the nonprofit organization), educational, research, scientific, religious or literary where the organization’s operations, services, or products are not created to earn a profit for private use.
I am often asked about “501(c)(3)” entities. While the Internal Revenue Service recognizes various different kinds of organizations for non-profit status, specifically, organizations frequently referred to as “Charitable Organizations” must be formed to operate for the reasons stated in section 501(c)(3) of the Internal Revenue Code, and none of its profits may be used for the benefit of any individual. Being a “501(c)(3)” entity means that a particular non-profit entity has been approved by the IRS as a federal tax-exempt, charitable organization per the requirements of Section 501(c)(3) of the U.S. Internal Revenue Code (“IRC”), which may include the nonprofit organizations considered private foundations, public charities or private operating foundations. Section 501(c)(3) states as follows:
“IRC 501(c)(3) exempts from Federal income tax: 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 (i)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.”1
In California, except as provided for in the California Revenue and Taxation Code Sections 23701h and 23701x, a non-profit entity doesn’t have owners or shareholders.2 Further, in California, the characterization of a non-profit organization is determined according to how it is formed. Such organization may apply for and be approved for California tax-exempt status. A non-profit organization may have personnel that receive reasonable compensation as well as volunteers. Broadly, employment taxes, as well as state and federal workplace and employment laws, are usually the same as those for other organizations.
Generally State of California recognizes the following types of non-profit domestic corporations that are incorporated in California:
- Non-profit Public Benefit Corporations: According to the State of California Tax Board “A public benefit organization must be formed for public or charitable purposes and may not be organized for the private gain of any person. A public benefit organization cannot distribute profits, gains, or dividends to any person.” 3
- Non-profit Mutual Benefit Corporations: According to the State of California Tax Board, non-profit mutual benefit corporation is “An organization that is most often organized for the benefit of its own members. It may not be formed exclusively for charitable purposes. If a mutual benefit corporation holds some of its assets for charitable purposes, it registers and reports on the charitable assets to the Attorney General of the State of California.” 4
- Non-profit Religious Corporations: According to the State of California Tax Board, non-profit religious corporations are “Organizations whose purpose is the study or advancement of religion.”
To determine weather a non-profit organization is suitable for your endeavors, what type your organization may quality for and how to best apply for and receive such federal and state non-profit status, always consult with an experienced attorney who can guide you through this often complex process.
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