Generally speaking, a nonprofit organization is an organization whose primary purpose is to achieve an objective other than the obtaining of profits. A "charitable" organization, however, is a narrower category. The term encompasses nonprofit organizations whose operations principally benefit the general public, usually with additional restrictions around application of assets, lobbying, political activity, and individual benefits to their members. This distinction is particularly important for equivalency determinations (EDs), because non-U.S. organizations devoted simply to "nonprofit" purposes may fail to qualify as equivalent to a U.S. public charity. In this blog post, we'll review a number of common nonprofit entity types that are not recognized as charities in the U.S.
Social Welfare Organizations and Civic Associations
In the U.S., the category of nonprofit organization that most often operationally intersects with charities is a "social welfare organization," described under section 501(c)(4) of the U.S. Internal Revenue Code. Such entities, which include civic leagues and community associations, are primarily focused on the common welfare of a community, but they need not necessarily be limited to "charitable" activities. Many of their activities do, nonetheless, qualify as charitable.
According to the IRS,
[t]o be operated exclusively to promote social welfare, an organization must operate primarily to further the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements). For example, … an organization formed to represent member-tenants of an apartment complex does not qualify, because its activities benefit the member-tenants and not all tenants in the community, while an organization formed to promote the legal rights of all tenants in a particular community may qualify under section 501(c)(4) as a social welfare organization.
Social welfare organizations are significantly less restricted in their activities than 501(c)(3) charities. Unlike charities, social welfare organizations are permitted to engage in substantial lobbying activity, and even some political campaign activity. They are also permitted to engage in social activities for the benefit, pleasure, and recreation of their members, as long as it is not their primary function. Such an activity is permissible as an element of their "social welfare" purposes, but it would not be considered a "charitable" activity. See Rev. Rul. 66-179 (PDF).
In the U.S., prominent examples of 501(c)(4) social welfare organizations include AARP (American Association of Retired Persons), ACLU (American Civil Liberties Union), certain HMOs (health maintenance organizations), and many individual Rotary clubs.
Trade Associations and Business Leagues
Trade associations, professional associations, and business leagues are described under section 501(c)(6) of the U.S. Internal Revenue Code. They are common in other countries as well, both locally and as global membership organizations. According to the IRS,
[a] business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. Trade associations and professional associations are business leagues. To be exempt [from income tax], a business league's activities must be devoted to improving business conditions of one or more lines of business as distinguished from performing particular services for individual persons. No part of a business league's net earnings may inure to the benefit of any private shareholder or individual and it may not be organized for profit to engage in an activity ordinarily carried on for profit (even if the business is operated on a cooperative basis or produces only enough income to be self-sustaining). The term line of business generally refers either to an entire industry or to all components of an industry within a geographic area. It does not include a group composed of businesses that market a particular brand within an industry.
As with social welfare organizations, trade associations and business leagues are permitted to engage in substantial lobbying activity, and even some political campaign activity.
Notably, not all industry-specific nonprofit organizations are necessarily trade associations or business leagues. An organization's programming may be focused on a particular profession without losing its charitable status, as long as it primarily provides benefits to the general public, rather than to a specific profession or members of that profession. For example, an association of dentists that meets to discuss advances in dentistry, publishes academic papers on dentistry available to the public, and educates dentists may still qualify as a charity. On the other hand, an association of dentists that helps dentists network, lobbies around dental malpractice laws, publishes a dental journal only available to its members, and promotes the dental profession generally, would more likely qualify as a trade association.
Labor Unions and Agricultural Organizations
Labor unions and agricultural organizations are described under section 501(c)(5) of the U.S. Internal Revenue Code. They are typically more recognizable as noncharitable entities given their heightened focus on union activities or, in the case of agricultural organizations, on technical agricultural endeavors. According to the IRS,
[t]he objects of [a 501(c)(5) labor union or agricultural organization] must be the betterment of conditions of those engaged in the pursuits of labor, agriculture, or horticulture, the improvement of the grade of their products, and the development of a higher degree of efficiency in their respective occupations.
Such organizations are commonly involved in significant legislative lobbying, as well as business negotiations on behalf of their members. Labor unions exist around the globe, some of which have global memberships or federations. According to the Organisation for Economic Co-operation and Development (OECD), 80 million workers in its member states are part of labor unions.
Social and Recreational Clubs
Country clubs, amateur sporting associations, fraternities, sororities, and hobby clubs typically fall under section 501(c)(7) of the U.S. Internal Revenue Code. While they are not operated for profit, they must be operated for the benefit of their membership and must be primarily supported by such membership. They must both have a limited membership (i.e., not be open to the general public) and provide an opportunity for personal contact among their members. While they must require some restriction for entry (payment of a fee, completion of an application form, etc.), they are prohibited from discriminating against any applicant or other person on the basis of race, color, or religion.
Other examples of nonprofit entity types that may not qualify as charitable — depending on their structure and operations — include social cooperatives, veterans groups, credit unions, fraternal societies, and employee benefit associations. Common among each of these is, typically, the ability to engage in substantial lobbying, as well as the lack of a primarily public benefit (charitable) purpose. There are, of course, always exceptions, and an organization's charitable status must ultimately be determined by a combination of its organizing documents and its actual operations. For more information on the legal requirements to qualify as equivalent to a U.S. public charity, see our e-book, Guide to Equivalency Determination.
- Rev. Rul. 66-179, 1966-1 C.B. 139: Situations under which garden clubs may qualify for exemption from Federal income tax under section 501 of the Internal Revenue Code (PDF document)
- Social Welfare Organizations (IRS website)
- Social Welfare Organizations Examples (IRS website)
- Business Leagues (IRS website)
- Labor and Agricultural Organizations (IRS website)
- Social Clubs (IRS website)
- Comparing 501(c)(3) vs. 501(c)(4) for Nonprofit Startups (NEO Law Group)
- Comparing 501(c)(3) vs. 501(c)(6) for Nonprofit Startups (NEO Law Group)
- Types of Nonprofits (Charity Navigator)
- Types of Tax-Exempt Organizations (IRS website)
This article is for general informational purposes only and does not represent legal advice as to any particular set of facts. Please seek legal counsel as you deem necessary.