When it comes to starting a business, there’s no shortage of options to choose from. Do you prefer growing your ecommerce business from the comfort of your own home? Are you focused on a life-changing cause?
While the vast majority of businesses fall under the for-profit category, going the non-profit route can be just as rewarding. Despite the appeal to those looking to make their mark on the world, there are many factors you should consider before making your decision.
Nonprofit organizations are subject to just as many rules and regulations as for-profit ventures. And because nonprofits are typically exempt from federal income tax, the US Internal Revenue Service (IRS) is careful to be specific and comprehensive in qualifying organizations. The result is a long list of nonprofit types, delineated by the Internal Revenue Code, which range from very broad to very niche.
Ahead, learn what a nonprofit is, and the many types of nonprofits you can form. Whether you want to start a veterans organization or are interested in public charities and how they work behind the scenes, this guide has you covered.
What is a nonprofit?
A nonprofit organization is a business organized for purposes other than turning a profit. Officially, a nonprofit organization (NPO) is a business that has been granted tax-exempt status by the IRS on the basis that it advances a social cause benefiting the public in some way.
While nonprofit organizations are focused on the greater good, the business itself still aims to make money—after all, the more profitable and efficient a non-profit organization is, the more people it technically can help. Of course, with that, nonprofits are prohibited from distributing profits they generate toward anyone or anything other than advancing the organization.
20 Types of nonprofit organizations
Nonprofit organizations span everything from state-chartered credit unions to companies dedicated to public safety, such as social welfare organizations.
While virtually all nonprofit organizations enjoy an exemption from federal income tax, not all types are able to extend tax deductions to their donors. Note that most of these types of organizations are highly specific tax designations, and are sometimes meant to be formed as subsidiaries of larger nonprofit companies mainly for the purpose of liability protection. Let’s just say that if the tax exempt status is your sole motivation for starting a non-profit, you’re in the wrong line of work.
These are 20 common types of nonprofits you may encounter as you start or grow your own nonprofit.
501(c)(1): Organized by an act of Congress
These types of nonprofits are organized by an act of Congress, such as federal credit unions. Since these organizations are set up by federal lawmakers, there is no application process and they don’t file tax returns.
501(c)(2): Titleholders for exempt organizations
501(c)(2) organizations hold titles to property (usually real estate or intellectual property) on behalf of other tax-exempt organizations. A 501(c)(2) can only be formed as a subsidiary of another nonprofit corporation, and they exist to shield property-owning organizations from some forms of legal liability. Many private foundations partake in this type of nonprofit. Title holding corporations generally fall under this category.
501(c)(3): Charitable organizations
Most nonprofits fall under 501(c)(3), such as religious, educational, and scientific organizations; public charities, etc. Examples include disease research institutions, private foundations, churches and synagogues, and traditional charitable organizations that work to improve public safety for example. Donations made to these types of nonprofits are tax deductible.
501(c)(4): Civic leagues, social welfare organizations, local employee associations
These nonprofits have fewer restrictions when it comes to political activity, such as lobbying or fundraising for candidates. The NRA, ACLU, and Sierra Club are all 501(c)(4) organizations that engage in political activity. 501(c)(3) organizations can’t be involved in this type of active political participation. Donations to this type of organization are not tax-deductible.
501(c)(5): Labor, agricultural, and horticultural organizations
The mission of these types of nonprofits is to improve working conditions and promote efficiency and quality of work in farming. These nonprofits can engage in political activity and like other nonprofits have a tax exempt status. Like labor unions, 501(c)(5) organizations are funded through membership dues and donations, which are only potentially deductible as a business expense.
501(c)(6): Trade and professional associations
These nonprofits include business leagues (associations of insurance brokers, realtors, accountants, etc.), chambers of commerce, and real estate boards. Their purpose is to promote good business conditions, and they may engage in political activity. They are funded by membership dues as well as paid educational programs.
501(c)(7): Social and recreational clubs
These are not-for-profit organizations, which differ from nonprofits in that they are not necessarily concerned with the furtherance of a social cause or public benefit. These organizations exist for the organization of activities for recreation or socialization, such as country clubs and sports leagues, they too are considered to be tax exempt organizations.
501(c)(8): Fraternal societies
A 501(c)(8) is a not-for-profit lodge society (meaning it meets regularly at a designated location) created to pay benefits to its members, such as sickness, accident, or life. They include service clubs, lineage clubs, and secret societies. Donations to 501(c)(8) organizations are not tax-deductible.
501(c)(9): Employee beneficiary associations
These nonprofits, called voluntary employee benefits associations or VEBA, provide payment to their members and their dependents in the event of an inability to work (due to illness or injury) or some other unforeseen event. Members must have a common bond, such as being employees of the same employer or members of the same labor union. These are typically funded by both the employers and the employees.
501(c)(10): Domestic fraternal societies and associations
Unlike 501(c)(8) and (9) organizations, these entities do not provide payment to members, they merely exist to support members’ preferred outside causes, such as third-party charities.
501(c)(11): Teachers’ retirement fund associations
These organizations source income through dues paid by public school teachers, tax revenues, and investment income. The funds pay the pensions for retired public school teachers.
501(c)(14): State-chartered credit unions and mutual reserve funds
These organizations provide financial services to members and the broader community, usually at a discount. They generate income through standard lending practices and government grants.
501(c)(15): Mutual insurance companies of association
These nonprofits offer insurance plans to local members at cost, usually for property damage, burials, and funerals.
501(c)(16): Cooperative organizations to finance crop operations
Under 501(c)(16) organizations, groups of farmers come together to pool resources for agricultural operations, usually to buy equipment, cultivate crops, take care of livestock, or handle shipping and marketing operations.
501(c)(17): Supplemental unemployment benefits trusts
This type of nonprofit exists to provide financial support to members—employees of the same employer—who are permanently or temporarily unemployed.
501(c)(18): Employee-funded pension trusts
This section of the Internal Revenue Code applies to employee-funded pension trusts created before June 25, 1959. These are funded only by member contributions and are used to pay out benefits to them.
501(c)(22): Withdrawal liability payment funds
These organizations are meant to meet employers’ obligations when they withdraw from multi-employer pension funds. They are funded by the employers themselves.
501(c)(23): Veterans organizations, pre-1880
This designation is solely for veterans organizations established before 1880, providing insurance and benefits to members. As with 501(c)(19) organizations, these must contain a membership of at least 75% armed services members, past or currently active. Funding comes from donations and grants.
501(c)(26): State-sponsored organizations providing health coverage for high-risk individuals
Members in these organizations are typically patients with certain medical risks of preexisting conditions who may not be able to get insured through other means. Funding comes from donations and grants.
501(c)(27): State-sponsored workers’ compensation reinsurance organizations
These nonprofits exist to provide workers’ compensation insurance to member organizations. They are funded by grants and membership dues.
Other 501(c) organizations
There are nine other 501(c) organizations that are specific to different laws (such as 501(c)(24), which is for trusts created under section 4049 of the Employee Retirement Income Security Act of 1974) or were created for specific groups of people (such as 501(c)(21), for trusts benefitting people with black lung, or 501(c)(28), which is the Railroad Retirement Board’s trust). While we’ve covered some of the most common types of nonprofits, there are over three dozen recognized by Congress.
Nonprofit organizations: Final thoughts
Organizing your business as a nonprofit may be advantageous if your goals are to advance social good or public benefit. Perhaps you hope to sell a product with the aim of using the funds to support some important cause. If going the nonprofit route, it’s important to choose the right type of nonprofit for your specific goals and needs.
Given the breadth of options available, choosing which type of tax-exempt status to apply for when forming your nonprofit can seem like a daunting task. Any potential nonprofit founder should consult an experienced nonprofit lawyer or relevant accounting professional for guidance through the process. This way, you can avoid selecting the wrong type of nonprofit for small business and risk forfeiting crucial tax-exempt status.
Read more
Types of nonprofits FAQ
What are the biggest challenges faced by nonprofits?
Despite being started for a good cause, nonprofit organizations often struggle to generate the revenue and funding needed to continue operations. It can also be challenging to raise money, build a sound business model, and lower profit margins at scale.
What is the difference between nonprofit and not-for-profit?
While often used interchangeably, there are several differences. A non-profit organization does not earn profits for its shareholders and is almost always tax-exempt. Not-for-profit organizations do not operate with the sole intention of making profit, but can be structured as corporations and associations and may or may not be tax exempt.
What are 3 common types of nonprofits?
There are several types of non-profit organizations, but the three most common types are charitable organizations, educational institutions, and religious organizations.
