Nonprofits vs. Charities

The terms “nonprofit” and “charity” are frequently used interchangeably. In today’s common society, we’re constantly led to believe they are the same thing; however, there are very important differences that have implications on your wallet. Even though they’re different, they may still both have a charitable purpose or significant impact on the community.

A nonprofit is, in North Carolina, a corporation formed under the North Carolina Nonprofit Act, Chapter 55A of the North Carolina General Statutes. In other states, there are similar statutes that nonprofits or not-for-profit companies are formed. Under North Carolina law, nonprofits are corporations with all the formal requirements of a corporation under North Carolina law. The major difference is that a nonprofit corporation may not issue stock of any nature. this means that there is no ownership of a nonprofit. It can be run by a board of directors or members acting as a board; however, an interest in the company may not be sold or transferred. This prohibition on selling or transferring interest in the company does not prevent a person from transferring his membership in a nonprofit, but such process for transferring membership must be defined in the bylaws.

A charity is a tax status recognition by the Internal Revenue Service. A charity is specifically defined under Section 501(c)(3) of the Internal Revenue Code. Charities can be formed if they’re formed and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. No part of the earnings may inure to the benefit of the shareholders or stakeholders. And, a charity is not allowed to have any substantial part of their activities to attempt to influence legislature, policy or the outcome of any election.

All North Carolina charities are nonprofits, but not all nonprofits are charities. Only charities receive the tax exempt status and the ability to deduct donations on individual tax returns. In order to become a nonprofit, a person must file Articles of Incorporation with the North Carolina Secretary of State. In order to become a charity, a person must filed for 1023 with the IRS only after the nonprofit has been formed.

In summary:

  • Nonprofits are state designations with no tax exemption;
  • Charities may only be formed after a nonprofit is formed;
  • Neither nonprofits and charities may be “owned.”

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