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What is the Difference between Nonprofit on a State Level and the 501(c) (3) IRS Level?

Considering the tedious paperwork and legal terms and jargon, setting up a nonprofit organization can be quite confusing and daunting. Many people confuse nonprofits on a state level with nonprofits on the 501(c)(3) IRS level. It is must be noted that while many areas of these two types of organizations overlap, they are not entirely the same and the terms cannot be used interchangeably. So, what is the difference between nonprofits on a state level and 501c3 organizations? Do we need both of them to become tax-exempt? Let’s find out!

The Basics – Understanding Nonprofits and 501(c) (3) Organizations

The first thing that you need to know is that not all nonprofits are tax-exempt and not every organization that is tax-exempt is a charity.

There are various types of nonprofits and to complicate things further, 501(c) (3) organizations are divided into foundations and public charities. These organizations may have a 501 (c) designation that provides them with different benefits, depending on how they are classified by the Internal Revenue Service (IRS).  

What are Nonprofit Organizations?

The nonprofit status of an organization simply means that the organization is incorporated under state law. However, it does not necessarily mean that the corporation is tax-exempt.

If you want to register as a nonprofit organization, you will have to register at the state level. It requires various steps, including appointing a board of directors of the nonprofit and submitting the required paperwork to the state secretary. You will also have to submit the articles of incorporation that include general information about the organization. The process of setting up a nonprofit at the state level is very complicated because it requires you to be familiar with IRS language. The processing fee of setting up a nonprofit can range anywhere from $25 to $175, depending on your state.

Once the organization is approved on the state level and receives its nonprofit status, it is entitled to certain benefits that are offered by the state. For example, the nonprofit may not have to pay the sales tax to the government or they may become eligible to apply for certain grants.   

What are IRS Recognized 501(c) (3) Organizations?

All 501(c) (3) organizations start as nonprofit corporations. Once they receive their nonprofit status on the state level, they can apply to become a federally tax-exempt organization. 501(c) (3) organizations receive more benefits. For example, they don’t have to pay income tax and sales tax. Moreover, they receive a charitable status and their donors can write off donations.

Keep in mind that a nonprofit is set up with the intent of getting recognized by the IRS as 501(c) (3). Your tax-exempt status will be declined if the initial documents that you submitted while setting up the organization on the state level do not align with the 501(c) (3) or tax-exempt intent. In this case, the only way forward is to make the required amends to the documents and then apply for the IRS application.   

Do You Need Nonprofit Status on a State Level and 501(c) (3) IRS Recognition to Become Tax-Exempt?

This is one of the most commonly asked questions. Many people wonder if they can become tax-exempt by acquiring a nonprofit status on the state level. Well, your organization will certainly enjoy added benefits due to its nonprofit status. However, you must obtain the 501(c) (3) IRS recognition to become wholly tax-exempt.

 It is important to mention that there are over 50 different 501 (c) classifications that an organization can receive based on its purpose, processes, and activities. So, while every 501 (c) organization receives some tax-exempt benefits, not all of them are charitable. If an organization does not possess a charitable status, the donors don’t receive a tax write off.  

Now that you know the difference between nonprofits on a state level and 501c3 organizations, you can start the process of setting up a tax-exempt organization 501(c) (3). However, it is not an easy process. Most applications are denied simply because of avoidable minor issues and errors. So, if you want to get a tax-exempt status, you need to gain expert knowledge. You can rely on A2Z FILINGS to guide you through the process. We can help you prepare the paperwork and secure a tax-exempt organization 501(c) (3) status from the IRS. Contact us today or visit our website to learn more about our services.