Nonprofits receive revenue through sources like grants, donations, and membership programs. They use their revenue to pay for expenses needed to operate their business, including employee salaries.

There are a variety of terms used for nonprofits. You may see a nonprofit organization called an NPO. If an organization serves a group of members rather than the general public, it may be called a non-for-profit organization. An example of a nonprofit institution is a public university. Sometimes you’ll see tax-exempt organizations casually referred to as “501c3 nonprofits.”

A key difference is that a for-profit company can distribute earnings to owners or shareholders, while a nonprofit is restricted from doing so. It’s crucial to maintain tight controls over an organization’s net earnings and finances to maintain this distinction.

Because nonprofit corporations have boards of directors to consult, nonprofits can be slower to act on opportunities than nimble startups.

A nonprofit may be formed as a corporation, but it is possible to create other nonprofit entities, such as a nonprofit LLC.

An LLC is a type of business legal entity, while the term 501(c)(3) refers to any organization that’s been granted tax-exempt status by the IRS under that specific section of the Internal Revenue Code.

It’s a section of the Internal Revenue Code—26 U.S.C. § 501(c)(3)—that makes qualifying organizations exempt from federal income tax and allows them to accept tax-deductible donations.

In addition to satisfying various IRS requirements, eligible organizations must generally be involved in religious, charitable, scientific, public safety, literary, or educational activities.

Civic leagues, homeowners associations, social welfare organizations, and political organizations are common types of nonprofits that don’t qualify for 501(c)(3) status. However, they may qualify for a tax exemption under other sections of the Internal Revenue Code.

Maintaining your tax-exempt status requires year-round compliance, including recording all finances and expenses, remaining compliant with nonprofit bylaws, and filing Form 990 annually with the IRS.

Both public charities and private foundations have 501(c)(3) status, but how they get funding differs. Public charities typically get funding from the public and government. Private foundations typically get donations from a few individuals, a family, or a corporation. Regardless of the funding source, none of the earnings can be distributed to private shareholders or individuals.