If you’re a socially-minded founder, you may have considered forming a nonprofit. There are many types of nonprofits, but the most popular is the 501(c)(3) nonprofit. At least 90% of all the nonprofit questions I’ve ever received are about 501(c)(3) nonprofits.
Some 501(c)(3) nonprofits you may have heard of are the Salvation Army and the SPCA. Other nonprofits include churches, legal aid organizations, and health clinics. The common thread amongst all these organizations is that each organization has a purpose that is recognized as tax-exempt by the IRS.
Tax-exempt purposes include charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.
Unlike other types of mission-driven entities, 501(c)(3) nonprofits are not taxed on their income. However, there are restrictions on how the income can be generated and used. If these restrictions aren’t followed, a 501(c)(3) nonprofit can risk losing its tax-exempt status.
Another difference between nonprofits and other mission-driven entities is that a nonprofit may not have any owners. Unlike corporations, where decisions are made by shareholders, a nonprofit is run by the board of directors. That means, as a founder of a nonprofit, you may not be able to retain control of it. Additionally, there are limits to the types of funds you can raise because unlike corporations, you cannot sell shares.
If you’re thinking about creating a mission-driven organization, you should consider the entity types that are available to you and your ultimate goals for the organization. There are pros and cons to each of these choices, so you should choose something that aligns with your goals and values and will give you peace and satisfaction years down the road.
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