How Long Can a Nonprofit Operate Without 501(c)(3) Status?

by Elizabeth Layne; Updated September 26, 2017
The Internal Revenue Service approves charities for 501(c)(3) status.

The word "nonprofit" has different meanings. The pertinent question may not be how long a nonprofit can operate without 501(c)(3) status, but whether a nonprofit should apply for the status at all. The answer depends on the plans for the organization and the nature of its services. 501(c)(3) status also depends on how the IRS views the nature of the nonprofit.

Informal Nonprofit

There are informal nonprofits -- those without formal recognition from the IRS -- and it is entirely permissible for them to remain that way. A group of neighbors, for example, can decide to form a neighborhood watch; collect money to buy tee-shirts, hats and flashlights for the watchers' use; and remain an informal nonprofit. However, without official IRS 501(c)(3) tax-exempt status, the group is not tax-exempt, and people giving to it cannot deduct the amount from their taxes.

501(c)(3) Public Charity

501(c)(3) is a section of IRS code that describes public charities, a specific type of nonprofit. According to the IRS, a 501(c)(3) nonprofit must be organized and operated solely for purposes that are "charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals." Examples of 501(c)(3) organizations include nonprofit hospitals, youth groups, educational institutions and local food pantries. Cedars-Sinai Medical Center, Salvation Army, Girl Scouts of the USA and Harvard University are all 501(c)(3) nonprofits. If a nonprofit does not fit this basic IRS description, it will not gain 501(c)(3) status.

Incorporation -- The Pros

Another option is incorporation. A nonprofit incorporates so that it exists as a separate legal entity in order to own property and open a bank account; ensure that the nonprofit continues on its own after the original leadership is gone; and protect board and staff from liability from the nonprofit's operations, among other benefits. Incorporation is handled by filing articles of incorporation with the appropriate state office. Incorporation is also a necessary step to accomplish before applying to the IRS for 501(c)(3) status.

Incorporation -- The Considerations

Research whether there is enough interest from people to sustain an incorporated group and whether a similar, incorporated organization already exists. If so, there may be no reason for incorporating a group. Also, the incorporation process is often costly and may require assistance from a lawyer.

501(c)(3) Status -- Pros and Cons

If the nonprofit fits the bill to be exempt from federal and other taxes and eligible to receive tax-deductible donations, it can apply to the IRS for 501(c)(3) status. However, besides the work and expense it takes to apply for IRS 501(c)(3) status, once the status is gained, the nonprofit must follow IRS reporting rules, such as making certain its records are open to the public and filing informational tax returns with the IRS. The Minnesota Council of Nonprofits warns that ongoing reporting and record-keeping requirements for nonprofits "represent substantial time and financial requirements and can be an obstacle to success and an unwanted distraction for people wanting to spend their time directly involved" in pursuing their interests or causes.

About the Author

Located in the mid-Atlantic United States, Elizabeth Layne has covered nonprofits and philanthropy since 1997, and has written articles on an array of topics for small businesses and career-seekers. An award-winning writer, her work has appeared in "The Chronicle of Philanthropy" newspaper and "Worth" magazine. Layne holds a Bachelor of Arts in journalism from The George Washington University.

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