Basics of Non-Profit Organizations

I. Introduction

There are a variety of types of Non-profit organizations under the Internal Revenue Code. Most are publicly supported charities. Unfortunately, the process of establishing a tax-exempt organization is significantly more time-consuming and expensive when compared to a regular for profit company.

II. Publicly Supported Charities

Public charities are organizations doing good works that receive funds from private donors. The donors get a deduction and the income is generally not taxable. If, hover, the charity earns business income, that may be taxable. IRC § 170(b)(1)(A)(i)-(vi)outlines the major types of "public Charities."
  • Churches or conventions of churches.
  • Tax-exempt educational organizations with a regular faculty/curriculum/body of students attending resident classes.
  • Tax-exempt hospitals and, under certain circumstances, organizations directly engaged in continuous medical research in conjunction with exempt hospitals.
  • Organizations operated exclusively to hold and administer property for state/municipal colleges/universities.
  • Governmental units.
Publicly supported organizations to qualify for tax exempt status, must meet either:
  • (1) More than one-third support test (support from public/governmental sources at least one-third of total support) or
  • (2) Facts and circumstances/10% test (substantial support -- at least 10% of total support -- from public, nature of publicly supported organization)

III. Donor Advised Funds

-- Community Foundations, Charitable Gift Funds Created by Financial Institutions and Funds Maintained by Universities, Etc

. A donor advised fund must qualify as publicly supported organization (one of two tests above). Its purpose is to give advice rather than not absolute direction to the beneficiary organizations.

IV. Supporting Organizations

There are three types of Supporting Organizations under the very complex tax rules of IRC § 509(a)(3)
  • Type I: "parent-subsidiary" relationship: operated, supervised, or controlled by publicly supported charity, which designates majority of Type I's governing body
  • Type II: "brother-sister" relationship: supervised or controlled in connection with publicly supported organization
  • Type III: "kissing cousin" relationship: operated in connection with one or more publicly supported organization

V. Private Foundations

Any organization described in IRC § 501(c)(3) except organizations described in IRC § 509(a)(1), -(a)(2), -(a)(3), or -(a)(4). 501©)(3). Non-profit organizations basically are divided into two classes: private foundations and public charities. Most private foundations are non-operating foundations, but other categories include operating foundations, exempt operating foundations, and pass-through (conduit) foundations.

VI. Private Operating Foundations

A Private Operating Foundation spends at least 85% of its adjusted net income or its minimum investment return, whichever is less, directly for the active conduct of its exempt activities (income test) and also meets the assets test, the endowment test, or the support test.

For a Checklist on start a Non-Profit Corporation click here.