Guide to Laws for Non-Profit Organizations in the U.S.

Non-profits may also be known as a “Not for Profit” or “NGO” or “Non-Governmental Organizations.” They come in many forms, and must follow various laws and regulations. Here is a very basic introductory look.

What is a 501(c)(3) non-profit?

A 501(c)(3) non-profit organization is one that is exempt from paying income taxes. In addition, donors to the 501(c)(3) can get a tax write off. There are two ways to become a 501(c)(3):

  1. Informal 501(c)(3): If an unincorporated (one that has not formed as a nonprofit corporation) charitable nonprofit has $5,000 or less in annual revenues, it may function as a 501(c)(3) without applying for IRS recognition of its status.1IRC 501(c)(3). Any such organization (other than a private foundation) is exempt automatically if it meets the requirements of section 501(c)(3). There is no requirement to file Form 1023. But you must file Form 990 for the taxes each year.
  2. Formal 501(c)(3): An organization can become exempt from paying income taxes by registering as a non-profit organization (usually non-profit corporation) with the state, and then filing Form 1023 with the IRS. There may be additional filing requirements, depending on the state.

Are there any alternatives to forming a Non Profit?

Yes, there are some alternatives, including partnering with an existing nonprofit (fiscal sponsorship) and social enterprise.

  1. Partner with existing nonprofit (Fiscal sponsorship)
    • This is where an established 501(c)(3) assists an individual or organization with a charitable program, where the 501(c)(3) usually charges an administrative fee or percentage of revenue (usually 5-15%)
    • Advantages – tax deductible contributions, easier/quicker than forming your own 501(c)(3), wider base of support (track record to show funders)
    • Disadvantages – lose some control. Project is under control of the 501(c)(3); must be part of nonprofit’s charitable purposes; admin fee
  2. Social enterprise (see below)

Can a regular company act like a non profit?

Regular for-profit companies may participate in charitable activities or donate a portion of their profits. However, if such a company does too much of this, the shareholders may feel that the company is not making enough money for them, and could sue their own company. This is where the Social Enterprise comes in. The most prominent example is the “B Corp” and/or “Benefit Corporation” which gives the company the freedom to do as much to benefit society as it wants. See more at our Guide to Social Enterprise.

What are the basic rules and regulations for non-profits?

In general, the staff or others involved in a non-profit organization may not engage in any inappropriate “self-dealing.” For example, they can’t force the non-profit to buy goods or services from their own companies at a higher than market rate.

Also, once any money or property goes into a non-profit, it can never be owned or controlled by an individual person again (except for salaries or payments for services or goods, of course). All of the assets, including all property and revenues, are forever contributed to the particular charitable purpose of the non-profit. If the non-profit is dissolved (closed down), any assets must go to a similar non-profit.

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