The Nonprofit FAQ

Should we incorporate a 'private' or a 'public' nonprofit?

Someone wrote to the Internet Nonprofit Center on February 19, 2004: I was just wondering if you could tell me the differences (advantages and disadvantages) of whether to incorporate as a private or public non-profit. Putnam Barber responded: I'm not sure which of several possible versions of your question you mean. You incorporate in a state. That state's nonprofit corporation statute will limit your choices. Usually these statutes are very broad and easily accomodate the sorts of activities most people associate with nonprofit status. There is no such thing as a "private" nonprofit corporation; nonprofit corporations must be operated for public or mutual benefit, with no profits going to owners. Once you are incorporated, you may wish to apply for federal tax-exemption. Publication 527 of the Internal Revenue Service (available through http://www.irs.gov and in print at offices) explains the various things to be considered in making such application. There are several types of tax-exempt entities permitted under federal law. The most familiar are business leagues (501(c)(6)), social welfare organizations (501(c)(4)), and "charities" (501(c)(3)). Only charities offer the benefit of routine tax-deductions for donors (in addition to exemption from corporate income tax based on their own operations). Charities are divided between "public charities" and "private foundations"; public charities must meet a "public support test" -- meaning that they receive revenue from a wide variety of sources. Private foundations usually receive their support in the form of an endowment or series of large gifts from a small group (often a family). Private foundations operate under slightly more burdensome rules than public charities. (For more information on this topic, see http://www.nonprofits.org/npofaq/16/27.html.) These questions are discussed in detail in Bruce Hopkins' book "Starting and Managing a Nonprofit Organization" from John Wiley & Sons. You can order it through this link (and generate a small royalty for The Evergreen State Society): http://www.amazon.com/exec/obidos/ASIN/047139727X/internetnonprofi. Hopkins urges that organizations not intending to operate as foundations take care to set things up to meet the public support test and not allow themselves to be classified by the IRS in the private foundation category. There is also a great deal of information about nonprofits in general at http://www.idealist.org/en/faqcat/13-17 and starting a nonprofit at http://www.idealist.org/en/faqcat/21-74. Posted 2/19/04 -- PB