Exempt Organizations – What Do You Call Your Organization?

Following my recent AFP webinar “When Raising Money, 10 Legal Things to Avoid” several participants wrote to ask what is the difference among the following:   

Nonprofit corporation:  This corporate entity is generally defined by state law.  The definition may characterize a nonprofit corporation as having no income and/or precluding distribution of any income to its members, directors and officers, and their family members or businesses, except when permitted by law.  A third characteristic is generally the absence of stock shares or other manifestations of an individual having an ownership interest in this corporate entity.  However, nonprofits do generate income which can be significant.  The question is whether this income is taxable or tax exempt income. 

Tax exempt or exempt organization:  If recognized as qualifying under applicable federal and/or state tax law, an entity’s income, including a nonprofit corporation’s, may be exempt from payment of corporate income tax.  If the organization’s corporate income qualifies for the corporate income tax exemption, then the IRS characterizes it as an “exempt organization (EO)”.   An exempt organization may still be required to pay other federal or state taxes, e.g. sales, unemployment, social security, property, or  “PILOTS” ( “Payments in Lieu of Taxes” are emerging as an alternative revenue source for municipal and county governments.).  For purposes of Federal law, when an exempt organization generates taxable income it is generally known as unrelated business income and the corresponding tax as the “unrelated business income tax or “UBIT”.   Too much of it and a nonprofit may lose its tax exempt status. 

Public Charity:  Exempt organizations fall into one of two broad categories: public charities or a private foundation.  A public charity is a charitable organization which is not a private foundation as defined by the IRS code.   The IRS makes this determination as part of the 1023 “Application for Recognition of Exemption under Section 501(c)(3)”process.   IRS code section 501 (c)(3) classifies eight different types of organizations eligible to qualify for tax exempt status as a public charity.  One specific classification is a “charitable” organization.  However, the other seven types are generally included as operating within the broadly defined “charitable sector”.   Donations to any exempt organization within these eight broad categories is a “charitable contribution” and a gift to them deductible by a donor as a “charitable donation”.

Given the preceding, perhaps another way for a reader to describe their organization more accurately is “a corporation recognized as qualifying for exemption from federal and/or state corporate income tax that serves a public purpose.”

As for me, I’ll stick with the generic “nonprofit” unless I need to define an entity based on  other distinguishing characteristics or a different classification by which exemption from corporate income tax is recognized.  By the way, the IRS code has nearly 30 different such classifications.

About Marty Martin, JD MPA

Marty Martin, JD MPA, Martin Law Firm, Raleigh, North Carolina, provides legal, tax, and training services related to nonprofit, tax-exempt, and social enterprise organizations serving local, regional, state, national, and international constituencies. He works with them throughout their lifecycle including start up, operations and management, board governance, merger, and closing down. He is an instructor with the Duke Nonprofit Management, Intensive, and Advanced Certificate in Nonprofit Leadership programs. He is a BoardSource Certified Governance Trainer. Martin is affiliated with North Carolina State University's Institute for Nonprofits. Martin served for three years on the IRS Advisory Committee for Tax Exempt and Government Entities ("ACT"). He was awarded the IRS TEGE Commissioner's Award which "is the highest honor of the Tax Exempt and Government Entities Division, and the highest honor we can personally bestow" for his service. He received a Master in Public Administration (MPA) degree with a concentration in managing nonprofit and public sector organizations from the Harvard Kennedy School and Juris Doctorate (JD) degree from Western New England University School of Law. He completed advanced training in nonprofit organizations from: Harvard Business School's Initiative on Social Enterprise; Harvard Kennedy School's Hauser Center for Nonprofit Organizations; Duke University's Nonprofit Management Program; University of California Berkeley Haas School of Business; Center for Creative Leadership; BoardSource; and the TCC Group.
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