This is the second in a series of articles on nonprofit organizations. Many businesses could qualify for and benefit from nonprofit status – but don’t realize the range of options available under the law. My aim is to share with you the research I’ve conducted concerning nonprofit organization.

The first article in this series talked about the importance of vision. Whether your business is set up as a for-profit or nonprofit organization, your business purpose will be to fill a certain need for others.

Vision is all about your business purpose. Who will you serve?

It could well be that you can serve those people better – even crowdfund the effort tax-free – by forming a nonprofit business instead of a for-profit business.

Let’s take another look at our case study.

How to Start a Nonprofit Organization – Classify Yourself

How One Nonprofit Raises Money for a Very Special Purpose

Kars4Kids is based in New Jersey, but they have offices across the United States. Their marketing methods are world-class: The Kars4Kids jingle embeds itself in listeners’ memory banks – ensuring that anyone within earshot of the commercial is going to think of Kars4Kids when it’s time to get rid of an unwanted vehicle. They use pay-per-click advertising and news releases to improve reach. Their website exemplifies the best in conversion optimization techniques. You name the marketing tool, and Kars4Kids is using it.

Kars4Kids is a nonprofit, but they use for-profit marketing methods to build business. According their “Donate Now” box, you’ll be joining over 400,000 other happy donors when you do a good deed (and reap tax benefits from your kindness).

Kars4Kids marketing
Kars4Kids doesn’t skimp on marketing. Their site is well optimized for conversions.

It’s cool. Very cool. Not only does Kars4Kids do a professional job of branding and marketing — they’re helping kids get better grounded in the Jewish faith and helping you and me with ways to lower our tax burden.

And you can do the same. Just decide who or what you want to help … and how you want to do it.

Stop with me here. Think a second.

Here’s a company bringing in a ton of money ($27 M in 2012) paying great salaries ($1.8 M in 2012) and kicking butt in the “marketplace.” They’re providing services to a certain group for specific purposes, and they’re providing a way for others to get tax benefits by helping them out. If ever there existed a “win-win” relationship between business and consumer … this is it.

It may be that your business idea could reap the same tax benefits as Kars4Kids. You don’t have to be poor to operate a nonprofit, but you do have to be smart!

Kars4Kids marketing banner
Kars4Kids could hold its own against any for-profit website in marketing techniques.

Does a Nonprofit Organization Fit YOUR Vision?

If you read the first article in this series and put some thought into your own vision, then you’ve identified the need you want to fill.

You also know, from that article, that you don’t have to work exclusively with the poor or try to help everybody on the planet – you’re free to serve any worthwhile need you see.

  • You could help people learn judo
  • You could build trails in the forest
  • You could research energy alternatives
  • You could help people plan and build homes
  • You could teach classes on how to publish a book

Just about anything you can think of doing, you can accomplish via a nonprofit. And listen: It’s not selfish to be passionate about something in particular and devote your efforts to working in that realm. The truth is that all great projects are birthed by someone who sees a need and decides to fill it.

Once you’ve identified the particular need you want to address, your next step is to determine which nonprofit organizational category your business would best fit.

Choose the Nonprofit Category That Fits Your Vision

Here are the nonprofit category choices (per the IRS) with brief descriptions:

Charitable Organizations: This is the type most widely known for qualifying as tax exempt. These nonprofit organizations qualify under IRS 501 (c)(3) requirements. You can organize as either a public charity or a private foundation.

Typically, public charities do the things we most think of nonprofits as doing. They are funded by donations and by business activities that further their (exempt) purpose. Your self-defense studio, for instance, could potentially be organized as a nonprofit serving the community.

Foundations are normally funded by a single source and serve other nonprofits or certain individuals. An example might be a family or corporate foundation that provides scholarships to students.

Social Welfare Organizations: These groups serve the public, but support a specific cause more than a specific need. They are exempt under the IRS 501(c)(4) designation. The National Rifle Association and the American Civil Liberties Union, for example, are social welfare organizations. Don’t be overwhelmed by the giants. They all began small. Do you have a cause you’re dedicated to? This could be the perfect business vehicle to pursue your dream.

Agricultural or Horticultural Organizations: Want to raise animals, till the land, or build a pond to raise fish? According to the IRS under Internal Revenue Code section 501(c)(5), your purpose here “must be to better the conditions of those engaged in agriculture or horticulture, develop more efficiency in agriculture or horticulture, or improve the products.” As with other nonprofits, you can’t be the beneficiary of the net earnings – but you CAN draw a salary for the work you do in the nonprofit.

Labor Organizations: Here’s a nonprofit category that’s seen plenty of fire over time. These are organizations of workers who come together to bargain with an employer collectively. I doubt that’s your aim, but if it is… you can find out more from the IRS.

Trade Associations, Social Clubs, Fraternal Societies, Veterans Organizations, and more: The list goes on. If your vision doesn’t fit any of the organizational types already mentioned, chances are good you can find the right fit somewhere in the list of possible tax-exempt organizations.

I told you the sky’s the limit. And it is. Just about anything you can think of doing, you can do under nonprofit status.

Check out the range of nonprofit categories on Charity Navigator.
Check out the range of nonprofit categories Charity Navigator uses on their website.

Why Doesn’t Every Business Organize as a Nonprofit?

Some folks don’t go the nonprofit route because the paperwork to get started is laced with hoops to jump. It’s not as complicated as it looks, though, especially to get started.

Others say that running a nonprofit is like putting honey out for ants. The IRS will have agents scrutinizing your every move. I guess that’s so, but every one of us is responsible to file taxes anyway. You don’t have to operate a nonprofit to get audited by the IRS.

The concern I’ve heard most often about nonprofits is that you have to give away all the money. How can you support yourself and your family while helping others at the same time?

Take a look at a Charity Navigator CEO Compensation Study, though, and you’ll find it’s entirely possible to earn a healthy income while working with a nonprofit.

In 2014, for example, the median salary paid to the CEO of a small charity in the Pacific West was $97,500. For a large charity, the median was $234,955.

I could live pretty well at either end of that spectrum. How about you?

How to Start a Nonprofit Organization – Here’s What to Do Next

Think back to your vision and go over the potential types of nonprofit classifications.

Tweak your purpose as needed. Get comfortable with your objective. Work with it until you get that feeling inside that says, “Yes! That’s it!”

Match your vision to the correct IRS classification, then to make sure you get notified when step three is ready to view, sign up here: How to start a nonprofit organization.

Please note: I’m not an attorney, nor am I attempting to offer legal advice. I’m an entrepreneur who wants to start a nonprofit and is working through the steps to accomplish that dream. My aim is simply to share what I find with you. If I’m wrong in my interpretations, please let me know.