Nonprofit organization in a nutshell

Yen-Yi Anderson, Managing Partner of Anderson & Associates, founded the law firm in January 2014. Yen-Yi Anderson focuses her practice on excellence in business immigration, commercial law, and civil litigation.

Jim Shih-Chun Hou is an Associate at Anderson & Associates and a contributing author for the Anderson & Associates blog.

What is nonprofit organization? And what is 501(c)(3) organization? There are various nonprofit organizations around us. According to the National Center for Charitable Statistics, 1.5 million nonprofits are in existence in the U.S. Some are as large as Salvation Army, Metropolitan Museum of Art, TED, World Bank, etc. Others are small groups or charities in our neighborhoods, like soup kitchen, food bank, hospital, or church. Regardless of the scale, they all share the same critical characteristics: charitable purpose and tax-exempt status.

An organization must serve for charitable purpose to be granted tax-exempt status by the IRS. Section 501(c)(3) of IRC defines those purposes: religious, charitable, educational, literary, preventing cruelty to animals and children, fostering amateur sports competition, testing for public safety, and scientific activities or operations. In addition, any profits made by a 501(c)(3) organization must be used solely for its exempt purposes rather than the benefit of any individual.

Accordingly, tax exemption is an incentive to an organization who operates exclusively for the exemption purposes. There are two aspects of tax exemption. First, the organization itself is exempt from federal income taxes, sales tax and property tax. Second, a donor who makes charitable contributions may qualify for certain tax deductions. This two-way tax benefit encourages people to engage in philanthropic activities.

Setting up your own nonprofit organization is not as difficult as it sounds. With experienced lawyers and accountants, you can form an entity, characterize it as nonprofit, and apply tax exemption (e.g. Form 1023) seamlessly. On top of that, you may extend financial support to organizations whose visions align with your value. In the end, both ways can make our society a better place.