What Is a Nonprofit: Types & How It Works (2026)

A nonprofit is a business entity organized to promote a public or social cause, rather than to generate a profit for its owners. It’s one option among several for anyone looking to start a mission-driven organization.

While starting a nonprofit can feel daunting, especially when it comes to funding, it’s worth noting that there’s plenty of opportunity for mission-driven organizations. In fact, according to Giving USA’s annual report on philanthropy, charitable giving hit $617.2 billion in 2025—and individual donors contributed $394.2 billion of that total. 

This guide covers what a nonprofit is, how they work, the benefits of nonprofit status, the different types of nonprofit organizations, and how to start your own.

What is a nonprofit?

A nonprofit organization (NPO) is a business that has been granted tax-exempt status by the US Internal Revenue Service (IRS) on the basis that it advances a social cause benefiting the public in some way. 

Forming a nonprofit happens in two separate steps. First, an organization incorporates as a nonprofit corporation under state law, the same way a standard corporation would file articles of incorporation. Second, it applies to the IRS for federal tax-exempt status, most commonly under Section 501(c)(3) of the Internal Revenue Code.

A nonprofit has no owners or shareholders. No single individual can hold equity in the organization or take a personal claim on its assets. In addition, nobody can sell or transfer ownership the way a for-profit founder might sell their company. Instead, a volunteer board of directors governs the organization on behalf of the public.

Nonprofits may bring in more revenue than they spend in a given year, but any surplus must be reinvested in the organization’s programs, staff, or operations, rather than distributed to individuals as profit or dividends.

They’re sometimes called non-stock corporations, or referred to by the subsection of the tax code that grants their exemption, such as 501(c)(3), 501(c)(4), or 501(c)(6) organizations. More than 1.9 million organizations held 501(c) status in fiscal year 2025.

While nonprofits enjoy federal tax benefits on their income, they typically still must pay employment taxes for hired staff, and individual states may offer even more tax benefits, such as exemption from paying sales taxes on purchases the organization makes for its own use.

How do nonprofits work?

Nonprofits run day-to-day operations similarly to for-profit businesses: they hire staff, manage budgets, and deliver a product or service. In a nonprofit’s case, it’s a program or public benefit instead of a good or service sold for profit.

The main difference is in governance. Since a nonprofit has no owners, a volunteer board of directors sets policy, oversees the executive director or CEO, and carries legal responsibility for the organization’s finances and mission.

Nonprofit revenue comes from several sources. A Candid survey found the most common revenue sources are:

• Individual donors (94.2%)
• Foundation and nonprofit grants (86.9%)
• Earned income like program fees and merchandise sales (51.4%)
• Government funding (46.1%)

Reporting 501(c)(3) organizations brought in more than $3 trillion in combined revenue in 2022 and reported nearly $3 trillion in expenses that same year. Transparency is an essential part of operating a nonprofit. Because the organization exists to serve a public benefit, it must file an annual return that discloses its finances, plus make its application for tax-exempt status and recent returns available to the public.

For a store selling products online, Shopify’s built-in tipping options also let customers add a donation at checkout, alongside apps built specifically for cause-based selling:

• DonateMate lets store owners add branded donation prompts across product pages, cart, and checkout. Merchants using the app have raised more than $8 million for nonprofits worldwide. 
• Shop for Good runs round-ups, portion-of-sale giving, and other cause marketing campaigns while handling the compliance and distribution work of routing funds to the charities a store supports.

What are the qualifications to be a nonprofit?

Because a nonprofit exists to serve the public, it has to make its financial and operating data fully available for donors to see how contributions are being used. Most organizations need to apply to the IRS for recognition of 501(c)(3) status before they can operate as fully tax-exempt, but churches and public charities with gross receipts under $5,000 a year are automatically treated as tax-exempt without filing an application.

Once an organization is recognized, it must comply with these rules set by both the IRS and state charity authorities:

• Promoting welfare. Nonprofits should first and foremost promote social good and public benefit, whether their mission involves educating the community, feeding the hungry, advocating criminal justice reform, or funding research to cure diseases.
• Political activity. A 501(c)(3) organization is prohibited from directly or indirectly participating in any political campaign at the federal, state, or local level (this doesn’t include nonpartisan voter education, like publishing a voter guide or hosting a forum). Violating this rule can result in denial or revocation of tax-exempt status and an excise tax on the amount spent on the activity. 
• Adherence to mission. To receive 501(c)(3) tax treatment, a nonprofit organization may not deviate from its core purpose or mission.
• Fair pay. 501(c)(3) status organizations can pay staff, including executives, but compensation has to be reasonable for the role, meaning it’s in line with what comparable organizations pay for similar work. The IRS treats compensation that’s out of step with the market as an excess benefit transaction, which can trigger excise taxes and put the organization’s tax-exempt status at risk.

Nonprofit vs. not-for-profit

The terms “nonprofit” and “not-for-profit” often get used interchangeably, but they aren’t exactly the same thing. Note that this distinction reflects common usage rather than a formal legal category. The IRS and state statutes don’t treat “not-for-profit” as its own defined designation.

This table compares the two terms:

Benefits enjoyed by a nonprofit organization

Forming and operating a nonprofit can be rewarding both in terms of impact and practicality. Here are some of the benefits nonprofit organizations have:

• Tax exemption. The most obvious benefit of forming and running a nonprofit organization is that it doesn’t pay federal income tax under the Internal Revenue Code. That said, exempt status can vary at the state level. 
• Limited liability. Incorporating as a nonprofit under state law protects directors, officers, and members from personal liability for the organization’s debts or legal judgments—similar to how standard limited liability companies (LLCs) are protected. Informally organized nonprofits, meaning those that never incorporate, generally don’t get this shield.
• Access to grants. Some nonprofits, such as certain religious organizations, are eligible to receive public and private grants. Access can be limited based on the type of nonprofit applying, since some grants are only available to 501(c)(3) organizations.
• Fundraising. Nonprofits can generate operating capital from donations. For 501(c)(3) organizations, those donations are typically federally tax-deductible for the donor, and some states extend additional benefits, like exemption from sales or property taxes on the gift.
• Lower platform costs. Registered nonprofits with valid tax-exempt status can request exemption from taxes on their Shopify subscription, on top of any exemptions available through their state.
• Helping others. A commitment to promoting social good can lend a deep sense of purpose to those involved, and it’s possible to earn a comfortable living from running a nonprofit while still ethically centering the mission.

These benefits also come with trade-offs. A nonprofit can’t be sold or transferred the way a for-profit business can, so founders can’t build resellable equity. Public disclosure requirements mean competitors can see financial details a for-profit owner might prefer to keep private, and pay for any executives and team members is bound by the reasonable-compensation rules covered above, which limits how a nonprofit can reward the people building it.

Types of nonprofit organizations

501(c)(3) organizations are the most common type of US nonprofit by far, accounting for more than 1.5 million of the 1.9 million tax-exempt organizations the IRS recognized in fiscal year 2025, more than 20 times the next largest category.

The IRS recognizes more than 30 different types of nonprofit organizations in total, ranging from general charitable organizations with a broad community mission to niche categories like benefit trusts for coal miners. While all nonprofits enjoy an exemption from federal income tax, not every type can extend tax deductions to its donors.

The most common types of nonprofit organizations include:

• 501(c)(3) organizations. Religious, educational, charitable, scientific, and literary organizations, private foundations, and animal welfare charities; plus churches, cancer research organizations, and literary arts organizations can be 501(c)(3)s. Contributions to a 501(c)(3) are tax-deductible.
• 501(c)(4) organizations. Civic leagues, social welfare organizations, and local employee associations. Local government advocacy organizations would qualify as 501(c)(4)s. Contributions to a 501(c)(4) generally aren’t tax-deductible.
• 501(c)(5) organizations. Labor organizations. Contributions aren’t tax deductible.
• 501(c)(7) organizations. Social and recreational clubs. Fraternities, country clubs, and hobby clubs all qualify as 501(c)(7)s. Contributions aren’t tax-deductible.
• 501(c)(9) organizations. Voluntary employee benefit associations. These pay out insurance to the families of sick or deceased workers. Contributions aren’t tax-deductible.

Examples of nonprofit organizations

Seeing how established nonprofits operate can clarify what these structures look like in practice. Here are three examples of real-life nonprofit organizations to learn from.

Feeding America 

Feeding America is a 501(c)(3) charity built as a nationwide network of food banks. In fiscal year 2025, the network distributed 5.9 billion meals through its more than 250 partner food banks and 60,000 affiliated pantries and meal programs.

Individual member food banks are separately incorporated organizations that coordinate through Feeding America for national sourcing, logistics, and advocacy. This shows how a nonprofit can scale its mission through multiple partners rather than one central operation.

United Way Worldwide

The umbrella organization for nearly 1,800 local affiliates, United Way Worldwide operates in 45 countries and territories. Each local United Way is a separately incorporated 501(c)(3) charity with its own board, budget, and IRS filings.

Local United Ways run their own fundraising campaigns, largely through workplace payroll deduction programs, and direct the money toward the community needs their board identifies. Some of these needs include early education, housing, or financial stability programs.

American Cancer Society

The American Cancer Society, by contrast, runs as a single central operation. It’s one 501(c)(3) entity governed by a single national board of directors. That means the nonprofit only has to deal with a single set of finances and one Form 990, along with its lone national board setting the strategy.

A mission can be organized as one large 501(c)(3), the way the American Cancer Society runs, or as a network of independently governed 501(c)(3)s that share a name and brand, like Feeding America and United Way. The right structure depends on how centralized or local an organization needs its governance and fundraising to be.

How to start or become a nonprofit

A nonprofit corporation can be designated as such from the start, or an existing for-profit organization can convert into a nonprofit legal entity. The steps differ depending on which route you take.

Starting a nonprofit from scratch

The process for founding a nonprofit varies state by state, but generally speaking, you must:

• Complete and file articles of incorporation. These formation documents must include the nonprofit’s name, contact information for its registered agent, and a designated incorporator (the person who signs the formation documents and submits them to the state governing agency). This step establishes the nonprofit corporation under state law and is separate from federal tax-exempt status, which comes later.
• Draft and adopt bylaws. These are the rules that will govern the nonprofit, and you’ll attach these to your IRS application when filing for federal tax exemption. Bylaws are adopted at your first official meeting, where you elect officers like a president, secretary, and treasurer.
• Apply for a federal employer identification number (EIN). This can be done online through the IRS or independent application services. Note that applying directly through the IRS is free, while some third-party filing services charge a fee to handle this for you.
• Apply for federal tax exemption. This is where your state-incorporated nonprofit becomes a federally recognized tax-exempt organization. The forms needed vary depending on the type of nonprofit you’re registering.
• Register as a charity with the appropriate state authority. Many states require organizations to register with a state agency before soliciting that state’s residents for contributions, in addition to registering as a nonprofit corporation. State attorney general offices and secretaries of state maintain the charity registries that make this transparency possible.

Note: This is not legal or tax advice. State requirements and IRS rules change, and the right structure and filings depend on your specific organization’s mission and location. Consult with a lawyer or accountant experienced with nonprofit formation before filing.

Converting a for-profit into a nonprofit

The rules for converting a for-profit organization to a nonprofit will vary state by state, but generally speaking, you must:

• Check business conversion laws in your state. Some business entity types aren’t eligible for conversion into nonprofits, and in some states it’s prohibited altogether. New York, for example, doesn’t permit statutory conversions of business entities, so organizers have to establish a new company, then merge the for-profit business into the nonprofit.
• File conversion paperwork. This usually takes place with the local secretary of state’s office. Rules and forms vary by state of incorporation. In California, for example, amended articles of incorporation reflecting the change in tax status need to be filed with the attorney general’s office at least 20 days before filing conversion paperwork.
• Apply for tax-exempt status with the IRS. This generally follows the same procedure as starting a nonprofit from scratch.
• Reorganize for-profit assets. After conversion, all existing business assets must be held in a charitable trust, meaning they can only be used for the organization’s purposes going forward. Assets might include cash, intellectual property, or physical property.