How to Start a 501(c)(3) Nonprofit Organization
How to Start a 501(c)(3) Nonprofit Organization FAQs
501(c)(3) Organization Definition
Public Charity vs Private Foundation
There are two types of nonprofits that are eligible for 501(c)(3) status: public charities and private foundations.
Meeting the criteria for a public charity is more difficult than for a private foundation.
In fact, all 501(c)(3) organizations are considered private until they can meet the requirements to be a public charity.
It is generally understood that public charities perform a direct activity (education, churches, etc.).
Organizations like the American Red Cross or World Vision give medical care or provide education for children in need, and are excellent examples of public charities.
Most public and private universities also have 501(c)(3) status as public charities.
Private foundations, on the other hand, typically fund other programs through grants, rather than fund their own activities.
The Bill and Melinda Gates Foundation, for example, is the biggest private foundation in the world.
An easy way to think about the difference between public charities and private foundations is to look at the Bill and Melinda Gates Foundation, they provide educational grants that pay for worthy candidates’ undergraduate and graduate degrees.
They don’t provide a direct activity, but instead provide the funding for other 501(c)(3) organizations to carry out their mission.
Another substantive difference between the two, however, is the manner in which they collect funds.
Although private foundations may accept some limited donations from individuals, usually the bulk of the funding comes from either a small pool of wealthy philanthropists, or even a single individual.
For this reason, private foundations have relatively fewer constraints on how they use their money.
An organization is eligible to be classified as a public charity if a significant portion of their donations comes from the general public or government.
At least â…“ of their total donations must come from the public, meaning citizens, corporations, and other nonprofits.
Since the public has such a heavy hand on the funding for a charity, public opinion can have a significant impact on the organization as a whole.
Requirements for Eligibility and Maintenance
In order for an organization to qualify for 501(c)(3) status, they must be involved with one or more of the following:
- Religion (such as churches)
- Charity (such as the Salvation Army)
- Literacy (such as the Barbara Bush Foundation for Family Literacy)
- Education (such as scholarships)
- Prevention of cruelty to animals and/or children (such as PETA)
- Fostering amateur sports, either locally or internationally (such as the Special Olympics)
- Public safety (such as Red Cross)
- Scientific activities or operations (such as museums)
There are also a few things that an organization cannot do without compromising its 501(c)(3) status.
- They cannot, for example, fund the campaign or activities of any political candidate.
- They can lobby, however, there is a limit on the amount of funds they can spend on this activity.
- If they exceed this amount, they may be obligated to pay excise taxes on the difference.
- They must also remain true to their mission.
- They are not allowed to use the funds they collect to finance a different project than the one they were established for, even if it is still an act of charity.
A program for the prevention of animal cruelty, for example, may not provide funding for an education program like a museum.
If a charity wishes to change its mission, it must first file the change with their state.
Application for 501(c)(3) Status
To apply for 501(c)(3) status, an organization must complete Form 1023 or Form 1023-EZ with the IRS, within 27 days of incorporating.
Along with the application to the IRS, the organization must also include their Articles of Incorporation.
Form 1023-EZ is a streamlined version of the standard form 1023.
However, not every organization can take advantage of it.
Check out this PDF from the IRS to see what the eligibility requirements are for form 1023, and instructions on how to complete it.
There are some cases in which an organization is not required to fill out either form to qualify for 501(c)(3) status.
Churches and public charities that bring in less than $5,000 per year are spared from having to submit these forms to the IRS, for example.
However, many may still choose to do so anyway to ensure that all donations are kept tax-exempt.
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About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.