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We're a Nonprofit Corporation - does that mean we're a 501(c)(3) and Tax-exempt?

Nonprofit organization setup

The short answer: NO! Not even close.

Unfortunately, a lot of people contact us saying they completed their own nonprofit incorporation, and now they're ready to apply for grant funding. The truth is all they are is a nonprofit corporation. They are NOT tax-exempt. (And that begs the question: did they incorporate properly? Did they include all the IRS provisions? In most cases they have not - but that's a subject for another article!)

When one incorporates as a nonprofit organization, the corporation is now a legal entity. Your articles and by-laws act as the guidelines for running your "nonprofit business." But obtaining nonprofit corporate status from your state does not automatically carry over to the federal government, and the Feds are the only ones who can approve you for that much sought-after 501(c)(3) status!

"Nonprofit" is really a misnomer, really. A 501(c)(3), while it is in most cases a nonprofit corporation, should really be referred to as a "tax-exempt" corporation or organization. Meaning as long as the funds you raise are done so with your stated purposes in mind and used for those purposes, those funds will not be taxed.


It also means that contrary to popular belief, a "nonprofit" organization CAN make a profit. It's what you DO with that profit that makes the difference!

So pretty much you must first incorporate as a nonprofit corporate with your state. THEN you must file an application with the IRS, requesting tax-exempt or 501(c)(3) status.

Once you've gotten the approval of both your state and the IRS - you may then call yourself a 501(c)(3) nonprofit corporation, and obtain grant funding.

And while most states will automatically recognize your federal tax-exempt status - most will still require you register with them as well, so be sure to check with your state to see what their requirements are for your situation!

So you're probably wondering "What are my options? Should I form a corporation, an LLC, or an L3C?"

Well, let's take a look at these different entities and see which one is best for you and your situation!

A Nonprofit Corporation --
This is a legal entity which has been incorporated under the law of its jurisdiction (i.e. in your state) for purposes other than making a profit for its board of directors or officers. Depnding on your state, a nonprofit corporation may seek official recognition as such, and may be taxed differently from, for-profit corporations, and treated differently in other ways. The IRS requires you apply for tax-exempt status (in most cases) after you have formed your nonprofit corporation.

In MOST cases - the nonprofit corporation is the way you want to go...and we do include setting up your nonprofit corporation, and development of your by-laws, in our services!

An L3C Company --
A low-profit limited liability company (L3C) is a legal form of business entity in the United States that was created to bridge the gap between non-profit and for-profit investing. It was designed to provide a structure that facilitates investments in socially beneficial, for-profit ventures by simplifying compliance with IRS rules for program-related investments, a type of investment that private foundations are allowed to make. Unfortunately, there are some issues: 1) only a few states allow the formation of an L3C (Illinois, Kansas, Louisiana, Maine, Michigan, North Dakota, Rhode Island, Utah, Vermont, and Wyoming); 2) it is NOT a "corporation" - it's a "company"; 3) the IRS does not yet recognize it or allow L3C's to apply for tax-exempt status.

Interestingly,after giving L3C's the green light in 2010, North Carolina no longer recognizes the L3C as a legal structure.

An LLC Company --
A limited liability company (LLC) is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. Note, an LLC is NOT a corporation; it is a legal form of a company that provides limited liability to its owners in many states. LLCs do not need to be organized for profit, however, in most U.S. states, businesses that provide professional services requiring a state professional license, such as legal or medical services, may not be allowed to form an LLC but may be required to form a very similar entity called a Professional Limited Liability Company (PLLC).  And in most cases, you should NOT form an LLC and then apply for tax-exemption from the IRS...

That said, an LLC CAN apply for and perhaps obtain tax-exempt status, but there are lots of conditions.  If the LLC is wholly owned by a single exempt organization AND if the LLC satisfies the 12 conditions described in an IRS paper called “Limited Liability Companies as Exempt Organization Update,” it has a chance. The LLC CANNOT have individuals or nonexempt organizations as members, and its organizing documents must state a purpose to further the charitable purpose.  The 12 conditions are listed here.