What is the difference between nonprofit and tax-exempt?

A lot of people (even in the nonprofit sector) confuse the terms “nonprofit” and “tax-exempt.” Just because an organization is a “nonprofit corporation,” does not make it “tax-exempt.” Since they are completely different concepts, it’s important to understand the difference between nonprofit and tax exempt. In short:

  • Nonprofit status refers to status under state law.
  • Tax-exempt status refers to federal income tax exemption under the Internal Revenue Code (the “Code”) and to certain state taxes.

What is a “Nonprofit”?

The word “nonprofit” generally is used to describe an organization that works to serve a public purpose, rather than to provide financial benefit to any particular individual, corporation, or entity.
Nonprofits are organized around a cause, mission, or community need. They are organizations that work to serve a public purpose.
Nonprofit organizations can be set up in several different legal formats, depending on your state. This is a state law concept. Your Secretary of State’s website can provide information on the different business forms allowed for your organization. Some may include:

  • Nonprofit corporation
  • Unincorporated associations
  • Certain charitable trusts
  • Certain limited liability companies

Again, since this is a state law concept, you should check with your specific state of incorporation. And know that it is acceptable to incorporate in a state outside of where you live. We have many clients who decide to incorporate their nonprofit in Texas because certain state law requirements may be more favorable in Texas.
In many states, nonprofit corporations are formed by filing “articles of incorporation”or a “certificate of formation.”
This certificate of formation is similar to a corporation’s birth certificate in that it shows when it came into existence.

What is “Tax-Exempt”?

Tax-exempt status exempts a nonprofit from paying corporate income tax on income generated from activities that are substantially related to the purposes for which the group was organized.
Many people mistakenly call such organizations “501(c)’s” or “501(c)(3)’s”. These letters and numbers refer to a specific tax category in the Internal Revenue Code.
A nonprofit organization – whether a corporation or an unincorporated association –  is not automatically exempt from federal or state taxes. To become exempt, the corporation must meet certain requirements and apply with both the IRS and the State.

Legal Counsel for Nonprofits

Cullinane Law Group PLLC is a Texas-based law firm specializing in nonprofit law. We exclusively serve public charities, foundations, associations, and other tax-exempt organizations so we understand the intricacies of running an organization in a highly-regulated sector.
From tax codes to federal reporting requirements, the legal side of running an organization can quickly get confusing. Our goal is to handle all the legal and tax matters, so you can focus on your cause and community.
We provide comprehensive, straightforward solutions to manage all of your legal needs: starting an organization, maintaining legal and financial oversight, and even handling complex legal crises. Legal services include general counsel, financial oversight, legal compliance and audits, as well as time-sensitive issues such as IRS audits.