A Nonprofit Organization (NPO) is a business entity created to serve the public good rather than generate private profit. Nonprofits can qualify for 501(c)(3) tax-exempt status with the IRS, which allows them to avoid federal income tax and makes donations tax-deductible.

​

Qualifications for NPO Status​

• Must serve a charitable, educational, scientific, religious, or literary purpose

• Must not operate for private benefit or political campaigns

• Must meet state filing requirements to be incorporated

​

Examples: churches, schools, hospitals, community organizations, foundations.

​

Operating Rules

• Nonprofits can hire employees and pay salaries, but all profits must be reinvested into the mission

• Required to follow strict reporting and compliance rules

• Donations and contributions may be tax-deductible for donors

• Must avoid excessive unrelated business income (to maintain tax-exempt status)

​

How a 501(c)(3) Organization Works

• Apply with the state to incorporate as a nonprofit corporation

• Draft bylaws and appoint a board of directors

• File IRS Form 1023 or 1023-EZ to request tax-exempt recognition

• Maintain annual filings with the IRS and state to stay compliant

​

Requirements of a 501(c)(3)

• No private inurement (profits can’t go to owners or insiders)

• Must remain true to its founding charitable purpose

• Must pay federal payroll taxes (Social Security, Medicare) for employees

• May not participate in substantial lobbying or political campaigns