What associations do you have with nonprofits? We bet a charity fund is the first thing that comes to your mind. However, nonprofits are much more than that, and there is a whole variety of organizations operating beyond common commercial scenarios and targeting different goals. Want to learn more about the types of nonprofit organizations that exist today? If so, in our article, you’ll find out everything you need to know about business entities of this kind. Just keep on reading.
Definition of a Nonprofit
As the name suggests, a nonprofit business entity, organization, or institution is a special type of enterprise that operates not for generating a profit and earning money for its owners but rather for serving some social purpose or public interest. For that reason, nonprofits are usually qualified as tax-exempt entities by the IRS from income taxes and other common tax payments. Meanwhile, any incoming funds and revenues are reinvested into the company to deliver to its mission and realize its socially important goals.
To start a nonprofit, first of all, you need to think over your decision in every detail since nonprofit entities are very much different from those created for bringing money. They are different in business approaches applied and methods of achieving business objectives. So, once you are strong in your intention to establish a nonprofit organization, you should clearly outline your mission. Then come up with a business plan to bring that mission to life and proceed to legal formalities that cover creating a business entity and filing for tax-exempt status with the IRS.
Types of Nonprofits
By and large, the IRS distinguishes between two major types of nonprofits. Under section 501(c), there are nonprofit organizations that serve the general public and not-for-profit organizations that rather target some narrower groups of people or serve certain members. However, there are wider classifications that offer many more types of nonprofits grouped by more specific and clear characteristics. Thus, overall, the IRS determined 27 types of nonprofit organizations that are differentiated by designation and intended purpose. Broadly, those types cover charitable, political, educational, scientific, literary, religious, environmental, healthcare, and social service organizations.
Nonprofits by Designation
Let’s take a closer look at nonprofits as they appear in different IRS sections and what those types of nonprofit organizations stand for:
- Social advocacy groups are usually created to push through some social or political aspirations by making them acknowledged. These groups are usually financed and maintained via membership contributions or funds raised through donations;
- Charitable organizations are the most common type of nonprofits since they could serve different purposes, and charity donations are tax-deductible that makes charities attractive for all types of sponsors. Besides, charity organizations are entitled to government grants and subsidies. Charities are usually dedicated to educational, healthcare, and religious purposes;
- Foundations are yet another popular nonprofit type. Typically established and maintained by rich people and high-profit businesses, foundations mostly function as supporters and donators for other nonprofits. Since foundations are tax-exempt, to retain their status, they have to make donations on a regular basis. In addition, foundations are politically neutral and cannot lobby any political interests or initiatives.
- Civic leagues, Social welfare organizations, and Local employee associations are less restricted in political promotions and more focused on the interests and rights of their members;
- Trade or professional associations are also member-oriented organizations seeking to create better business conditions for their members. Usually, they are financed via membership fees and offer some special programs to their members to improve their professional and training levels;
- Recreational clubs are meant for some recreational and socially meaningful activities for people sharing the same interests, be it sports, hobbies, arts, literature, etc.;
- Fraternal societies are set up to exclusively provide different types of support to their members to help them in case of sickness, accidents, or any events negatively impacting their welfare. Technically, these societies should have parental organizations maintaining them and could have subordinates;
- Employee beneficiary associations deliver to the interests of their members who are employees from the same workplace. Such associations provide help to employees and their dependant persons in case of disease, injury, or any unforeseen events impacting health conditions. Most often, it’s done via insurance;
- Domestic fraternal societies are created to provide help outside the membership, yet at the account of membership fees. By way of contrast, fraternal societies are initially established for membership needs;
- Teacher retirement fund associations are normally local nonprofit organizations existing at the account of regular member fees, taxes, and investment income. Their main purpose is to efficiently manage retirement funds for teachers;
- Cemetery firms exist for ensuring burial services to their members and source funds from membership fees and sponsor donations;
- State credit unions and reserve funds are state-specific organizations supported by the government and its members. In return, they provide financial services to their members at lower rates;
- Mutual insurance companies offer insurance benefits to their members that come at a fee. Most often, it’s property damage insurance;
- Cooperatives to finance agricultural operations are founded by farmers to get resources for some urgent activities in the high season or to finance the purchase of vital agricultural assets;
- Supplemental unemployment trusts ensure added help to unemployed who have some temporary or permanent issues. These organizations are to be financed either by an employer company or by employees themselves;
- Employee pension trusts can be funded only by employees and exist to deliver benefits to those employees when they retire;
- Veterans organizations bring benefits to current or former members of the US armed forces. In fact, such organizations are normally established by those members since 75% of membership should belong to military servants;
- Black Lung benefits trusts are funded by coal mine companies to provide aid to coal miners pursuant to claims under the Federal Black Lung Benefits Act;
- Withdrawal liability pension funds are established and maintained by employers that help them fulfill their pension commitments;
- State organizations providing health insurance to high-risk individuals raise funds from sponsor donations and state grants to insure patients with high health risks who cannot get insurance from common insurance companies;
- State workers’ compensation reinsurance organizations are set up by institutions and agencies paying workers’ compensations to pool funds for insurance coverage;
- Religious associations bring together religious groups to create a common pool fund for different purposes. Notably, donations to these associations are not tax-exempt and shared income is also taxed;
- Cooperative hospital service organizations usually choose two or several hospitals to provide the necessary support to patients and their relatives. These nonprofits are predominantly funded through donations.
Nonprofit Types by Legal Structure
While nonprofits widely vary by designation or intended purpose, when it comes to their legal form, nonprofits could be registered as corporations, LLCs, trusts, foundations, or even can be set as unincorporated organizations.
Strange though it might seem, unincorporated nonprofits are not that rare. When two or more individuals cooperate for a shared purpose to provide some sort of public benefit without registering a legal entity, they create an unincorporated nonprofit. Usually, this takes place for some specific projects or one-time initiatives. However, if you have long-term plans and objectives or have a broader mission in your mind, you’d better form a legal entity for that. This way, it will be easier to file for tax-exempt status and make use of other legal benefits.
Trusts are among the most popular legal forms for nonprofits. Trusts allow pooling and distributing funds in a more transparent and convenient manner. Charitable trusts exclusively serve charity purposes while the grantors contributing their assets to the trust are entitled to manage those assets to multiply income and raise added funds for beneficiaries.