Most people associate the term nonprofit with reputable and large public charities and well-known private foundations. However, the term Nonprofit is not synonymous with just charity and donations. In reality, nonprofit is an umbrella concept that refers to almost thirty types of organizations registered under Section 501 of the Internal Revenue Code. All these organizations are nonprofit as they are exempted from taxes, unlike other organizations. They cover everything, from labor unions and social groups to charities and churches.

The one element that unites all these different kinds of nonprofit organizations is that they are formed to promote or work for a good cause, a social cause. They are human rights advocates and spur debates and conversations that spark a public outrage for change and accountability. They take action on important issues, including creating public awareness, climate change, sexual abuse and molestation, disease research, or coming together for a good cause.

To keep their organization afoot, nonprofits rely upon donations. This is also essential to retain their tax-exempt status. They advocate their cause to gather donations and then funnel these donations back into the organizations to further strengthen and promote their cause. They can make profits, but those are only used to cover basic costs like operating expenses and staff salaries.

According to reports, there are more than 1.6 million nonprofits or tax-exempt organizations in the U.S alone. These numbers include all the organizations listed under Section 501 of the Internal Revenue Code, from cultural centers and churches to disaster relief foundations and food banks. Nevertheless, becoming a part of this thriving sector of the economy is not as easy as one might think. You need to understand the different types of nonprofit organizations and how each works, choosing the one that best supports your cause.

If you plan to start your nonprofit organization to forward a cause you believe in, you will first need to understand each of them. This post will take you through the different types of nonprofit organizations listed under section 501, explaining each of its specifications and elements in detail.

A few women wearing volunteer t-shirts while working for an NGO

Incorporated and Unincorporated Nonprofit Organizations

As mentioned above, most people assume that only incorporated nonprofits, such as the American Red Cross, PETA, YMCA, and the American Civil Liberties Union Foundation, among others, come under the umbrella of nonprofit organizations that are exempted from taxes. However, they neglect the unincorporated nonprofits, even though they may be supporting one without even knowing.

Unincorporated nonprofits are not formal organizations, but their mission is the same, to work and promote a social cause and pursue work in the field of public interest. When two or more people collaborate to offer a public service or work for the public benefit, it is referred to as an unincorporated nonprofit. For example, two school girls set up a lemonade stand in their neighborhood and donated the proceeds to a pet charity. This is a perfect example of an unincorporated nonprofit organization.

Such nonprofits mostly work on a short-term cause and then proceed to their next project or mission once they have fulfilled their goal. This is only suitable for people who have short-term goals in mind. If you have a cause that requires long-term work and commitment, like helping victims of sexual abuse, you should consider incorporating your nonprofit organization, making it an adequate legal entity. Formalizing your association as a legal nonprofit will let you avail of the many benefits it offers, including more outreach to raise funds, limited liability protection, and others.

Despite the numerous benefits of incorporated nonprofits, unincorporated nonprofits remain popular. What’s more, unincorporated nonprofits can also be granted tax-exempt status, given they fulfill certain conditions. However, this only works in some cases.

People handing out gifts and donations at an NGO event

Public Charities and Private Foundations

These are two other popular forms of nonprofit organizations. While public charities offer services, private foundations are often dedicated to raising funds to support a cause, such as disease control or flood relief. Private foundations support public charities through the funds and grants they receive. However, in some cases, the funding does not come from the public; rather, they are a small group of wealthy people funding the cause.

Additionally, both the associations have different structures of governance as well. Public charities must abide by all government rules and regulations and are often subject to public opinions and scrutiny. They need to operate with a high degree of transparency, and they will be held accountable for any mishap. Plus, they also have a board of directors who should belong to diverse backgrounds so that the entire community can get equal and fair representation. For instance, more than half of the board members should be from outside the business ownership criteria, and they should be unrelated by marriage and blood.

On the contrary, private foundations operate more discretely, under the supervision of a family member, individual, or corporation. For instance, the Bill & Melinda Gates Foundation is a great example of a privately held foundation. However, these private foundations must undergo more rigorous paperwork and legal procedures to confirm their authenticity. This is to ensure that the funds raised and donations received are not used for any else other than the said cause or goal. As these foundations are not obligated to be transparent, it’s easier to exploit the funds.

The National Taxonomy of Exempt Entities – Core Codes (NTEE-CC) is a system used by the Internal Revenue Service (IRS) to catalog public charities into twenty-six main groups, which are spread across ten categories. These include:

  1. Arts, humanities, and culture
  2. Education
  3. Environment and animals
  4. Health
  5. Human services
  6. International and foreign affairs
  7. Public and societal benefit
  8. Religion-related
  9. Mutual/membership benefit
  10. Unknown/unclassified

Furthermore, private foundations require a lot more capital to establish the organization and cover legal expenses. While you will need one to two million dollars in most cases, you can also start small and gradually add assets to your nonprofit.

A woman wearing a volunteer badge

Nonprofit Trusts

Another common type of nonprofit organization, these trusts come under three categories; charitable remainder trusts, charitable trusts, and pooled charitable trusts. Let’s take a look at a brief overview of each category.

Charitable Trusts

This is the first form of a legal nonprofit trust. Charitable trusts must dedicate all their assets to the charitable purpose they are working for. Assets, such as jewelry, cash, or art pieces, are deposited into a trust for beneficiaries by the grantors.

The assets remain with the trust until the grantor is alive, and they may even use those assets to raise funds such as auctions, etc. All the money generated using the assets will be dedicated to the fund’s beneficiaries. In some cases, these trusts may survive the grantor, given there is sufficient documentation to establish authenticity.

Charitable Remainder Trusts

A charitable remainder trust is another popular form of an irrevocable trust. These trusts articulate a different income-sharing plan. Instead of forwarding the funds to a specific nonprofit, this association gives the income to the grantor or the person the grantor specifies as a receiver.

Pooled Charitable Trusts

This is a great alternative for those wishing to leave a fund for a school or any other charity. The school or charity creates the trust, and anyone who wishes to contribute can donate. This way, the entire donations are pooled into a single trust. These pooled funds can then be invested to double the money.

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Political Organization

Most nonprofits and charities have limited political interference and participation. However, political organizations function with different rules and regulations. These organizations are formed to influence any political elections or influence the public opinion about a certain political party. These may include:

Moreover, political organizations are classified as tax-exempt nonprofits and can make expenses and accept donations likewise.

An empty church

Churches and Other Nonprofit Organizations

Churches and religious ministries are other types of nonprofit organizations. They are also classified as tax-exempt organizations as they work for the welfare of people and promote the work of God. Churches are formed with the vision of serving the community and offering a haven. It is where prayers and congregations take apace.

Also, various events like weddings, funerals, masses, and sermons take place at churches. Some churches even set up funds and donate the money to a specific cause. For instance, if a church organizes a bake sale within the community and donates the proceeds to an orphanage, it will be referred to as a charitable act.

In addition, they also contribute to setting up schools or serving the homeless food to benefit the community as a whole. Churches and religious ministries also rely on their reputation like any other reorganization to secure funding and donations. They even rely on donations for any repair work within the church, for example, bringing in a new set of Bibles.

A male volunteer packing up donation boxes

Other Organizations

In addition to the nonprofit associations mentioned above, various other organizations come under the umbrella of nonprofits, including:

All the information regarding these nonprofits is available on the IRS website.

Final Thoughts

As there are so many different nonprofit organizations, choosing the one that works best for you and serves your purpose can be an overwhelming task. Some have more benefits than others, and others have more drawbacks than the rest. It is up to you to decide the best fit.

Ultimately, it all comes down to the purpose you choose to work for. To make things simple, start by understanding the specifics and dos and don’ts of each type of nonprofit. This way, you will easily determine whether you should opt for an incorporated or unincorporated, public or private, or the status of a trust or religious ministry.

Teamwork concept

Get an Affordable Church Liability Insurance Plan

Nonprofit organizations like churches are usually underfunded. They often do not have the resources to hire an in-house attorney or even a full-time staff member to deal with insurance matters. This can make it difficult to prioritize and plan for insurance needs. Fortunately, there are ways you can reduce the cost of your insurance and still have the coverage you need to minimize the risk of disaster.

If you’re looking for a reputable church insurance company, Integrity Now Insurance provides customized church insurance policies in multiple states, including California, Arizona, Washington, Ohio, and Nevada. We specialize in a whole suite of insurance services, including but not limited to general liability insurance, business auto insurance, workers compensation insurance, directors and officers insurance, abuse and molestation insurance, and more for nonprofits and faith-based organizations

When you choose us, you will be able to feel confident that your assets are protected in all types of situations. We are passionate about nonprofits and churches and work hard to get you the best policy quotes from insurance companies .

We offer guidance to nonprofits and churches on protecting themselves while fostering their mission in several states, including Texas, CaliforniaOhioArizonaNevadaWashington, and Colorado.

So what are you waiting for? To have our church insurance brokers look after your church insurance plans, call us at (877) 854 7396. Alternatively, you can get in touch with us on our website for more information about our policies and how they can protect your nonprofit or charity.

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