Clarifying Point: "Nonprofit" does Not Mean "501(c)(3)"

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Happy Holidays and Happy New Year all!   As it is the giving time, I actually took time to give a donation through Friends of Hawaii Charities, Inc. page, as I was going through the process this triggered my busy-filled brain that I was going to do a series of one-sheets and posts about non-profits, tax-exemption status, and the meaning of 501(c)(3) . . . which as you can see I have not done.

So I figured let's just do a short post on one aspect:  namely, terminology and use of phrases of "nonprofit", "nonprofit corporation" and "501(c)(3)".

Be Specific: The Importance of Right Word

Many times, we use language in a way that does not comport to "legalese".  It is true is easier and sometimes the "officialness" of the word tends to confuse rather than help. However, for attorneys, especially transactional ones, like myself, we often correct clients that conflate a "corporation" with a "LLC".  They are NOT the same entity.  Further, this translates into a shareholder owns stocks/shares in a corporation whereas a member owns membership/ownership interest in their LLC.  While, this can get confusing to the average businessperson, we attorneys use it to understand what type of situation we are facing for the purposes of ownership, rights, obligations, taxes, etc . . . 

So this brings me to the point of this post.  I hear many times people use the word "nonprofit" to mean the same thing as "501(c)(3)" and vice versa.  While, a 501(c)(3) is a type of nonprofit, not all nonprofits are 501(c)(3) organizations.  (If you remember nothing else of this post, just remember that sentence!)

What is a Nonprofit?

Many people think that "nonprofit" means that the organization does not make money. While, in a sense true, that does not paint the whole picture.  Like many laypeople's interpretation of the mechanics of law that is oversimplified.  The designation of being a nonprofit does NOT mean that the organization does not intend to make a profit.  What really means is that the organization has no owners (like shareholders or members of for-profit corporations or LLCs) and that the revenues earned by the organization do not inure to any particular owner.  In fact, there are some large revenue-generating nonprofit organizations out there, and one has had some headlines recently is the National Football League (NFL).  

Yes, the NFL is a nonprofit; specifically, under the US Tax Code it is a 501(c)(6).  I will get to the 501(c) thing in a minute.  I'd like to finish this thought on "nonprofit" before segueing to the 501(c).  You see, in the United States, because business entity formation happens at the state-level (here in Hawaii you go through the Department of Commerce and Consumer Affairs, and in other states through the secretary of state), a nonprofits first step toward 501(c)(3) is to become a nonprofit corporation.  

At that point, after your Articles of Incorporation are filed, you have a nonprofit corporation in your state, BUT you are NOT a 501(c) tax-exempt nonprofit organization. 

What are 501(c)s? and Specifically What is a 501(c)(3)?

After you have a nonprofit corporation most organizations try to determine whether or not to seek further 501(c) status due to their purpose.  Notice that I mentioned that the NFL is a 501(c)(6), which is a Business League,  but in total there are about 29 different types of 501(c)s of varying use.  The most well-known is what everyone thinks of as a nonprofit, which is an organization organized for charitable (or similar purposes) and has 501(c)(3) status.

If the nonprofit corporation has a charitable purpose, its board of directors, generally, tend to seek 501(c)(3) status form the IRS.  Why?  This tax-exempt status confers a benefit to the donor.  If you look at the website that I made donation to this is the language they use:

Your donation is made to Friends of Hawaii Charities and is tax-deductible because Friends of Hawaii Charities is a 501(c)(3) tax-exempt charitable organization.

For charitable organizations, that is they key feature of a 501(c)(3) tax-exempt status, allowing the donors to get a tax deduction.  I will save discussing the application process for clients, law talks, future one-sheets and posts, but suffice to say it is a long process.  Basically, to receive this special status the nonprofit corporation has to meet certain criteria, and even after it gets its 501(c)(3) status the organization then must do certain things or is barred from doing activities.  For example, 501(c)(3) organizations cannot support political candidates and conduct extensive lobbying whereas the 501(c)(4), civic leagues, and now known due to the past election cycles, as "Super PACS", are not barred from these activities (yet). 

Last Word: Know the Terms

I hope this clears the confusion when you use the words "nonprofit" and "501(c)(3)". Nonprofit is just a general catchall, and consider the fact that the term can just as easily apply to a casual association as well as a formal organization (i.e. one that has filed Articles of Incorporation to become a nonprofit corporation).  Then, you take your nonprofit corporation and apply for 501(c)(3) tax-exempt status.  If that does not help, as always seeks an attorney or professional and they may explain it better than me. In the meantime, enjoy the end of your 2013 and have a Happy New Year!

-RKH

P.S. If you are feeling giving, be sure to check out the Friends of Hawaii, Inc. site and give to a Hawaii nonprofit through Friends of Hawaii, Inc., which is a 501(c)(3) charitable organization before 2014 hits!