There are many types of nonprofit organization and they have been classified into different categories as per Section 501 of the IRS rules.
We will first discuss charitable organizations that fall into the category of Section 501 (c)(3) of the IRS rules, as they are the most common kind of nonprofit organizations in the country.
Type 1. 501 (c)(3) organizations
A new start up nonprofit organization falls under the jurisdiction of section 501 (c)(3) if it is:
f) Concerned with public safety ,
g) Promotes amateur sporting activities OR
h) Works for the prevention of cruelty towards children or animals.
Most of the nonprofit organizations do actually fall into ‘charitable’ category of IRS classification.
The term ‘charitable’ in itself allows for inclusion of vast variety of nonprofit organizations and is thus applicable in most of the cases.
Thus organizations like alumni associations, clubs, schools, chapters of international organizations also qualify as relevant for this section.
If your organization does not fall into any of these categories, you may first have to identify the relevant category by studying the IRS publication 557 before you proceed.
Besides this IRS classification, the nonprofit organizations can also be classified as follows:
Type 2 – Private Foundations -
A Private foundation solicits funds and donations from a limited number of members who contribute a major portion of donations to the organization.
Foundations generally do not actively or directly engage in actual charitable work. Instead, they fund other organizations that work on the chosen causes.
Type 3 – Public Charitable organization
- A public charitable organization on the other hand accepts donations and funds from a large section of people through membership subscription or from a variety of funding agencies.
To be classified as a Public charitable organization the body must have an active or continuing program to raise funds and receive donations from a number of sources which could include the private organizations, funding agencies, the general public, or the agencies set up by the Government.
Public charity organizations can obtain tax exemption. The most common type of public charity organizations include charitable hospitals, churches, medical research centers, educational institutions including schools, colleges and universities,
Type 4 – Quasi Nonprofit organizations
– These are hybrid organizations with a mix structure of different types of profit and non organization structures. We can ignore these for now as they are structured in a complex fashion and are not recommended for new start ups.
Other types of Nonprofit organizations
(that do not come under 501(c)(3) classification)
a) Advocacy groups – These kind of organizations are formed to influence the legislations or Government policies on particular issues.
Such nonprofit organizations do not classify as charitable organizations and as such cannot claim tax exemption under section 501(c)(3). Selective tax exemptions are available under different clauses of Section 501 (c) for such organizations.
b) Membership Organizations – The are usually setup for the benefit of the members of the organization as opposed to a public charity that works for a community. Examples include – Veteran’s groups, Trade Associations etc.
c) Recreational Clubs – The primary activity of such groups is providing recreation facilities and platform for its members. Charitable activities may also be undertaken but not as a priority. Examples include – country clubs, sports club etc.
d)Auxiliary organizations – These organizations are set as a subsidiary or as a support organization to a parent organization. The parent organization may be a ‘for-profit’ or a ‘not-for-profit’ organization in this case.
e)Employee Benefit Funds -These are organizations which may or may not be supported by the employer of the organization but are established with the prime objective to formulate plans and raise funds for employee benefits.
The rules and processes that will govern your nonprofit organization will depend on the classification that you decide for your organization.
It is therefore vital that you identify the classification under which you seek to start your organization at the very beginning.