“Nonprofit” and “501(c)(3)” are not the same thing. People use them as if they were — and that mix-up costs organizations money. Here is the difference:
A NONPROFIT is created by a STATE. You file articles of incorporation with your Secretary of State as a nonprofit corporation. That is all the word “nonprofit” means: a corporation with no owners and no shareholders, where no part of the earnings may go to a private individual. Surplus money stays locked in the mission. The state created your organization — but the state gave you no tax break.
A 501(c)(3) is recognized by the FEDERAL government. It is a tax status granted by the IRS under section 501(c)(3) of the Internal Revenue Code. It does two things state incorporation never does:
1. It exempts the organization from federal income tax.
2. It makes donations tax-deductible for the donors (under section 170).
Here is the part people miss: forming a nonprofit corporation does NOT make you a 501(c)(3). They are two separate approvals, from two different governments, in a specific order:
State incorporation → EIN → application to the IRS (Form 1023 or 1023-EZ) → IRS determination letter.
Until that determination letter arrives, you are a nonprofit that still owes federal income tax — and your donors get no deduction. (A few categories are treated specially — houses of worship and very small organizations have their own rules — but everyone else must apply.)
And the layers don't stop there. Even with 501(c)(3) status, STATE tax exemptions — like sales-tax exemption — are usually a third, separate application to your state.
So the simple way to remember it:
“Nonprofit” is what your organization IS — its legal structure, from the state.
“501(c)(3)” is what the IRS RECOGNIZES — its federal tax status.
Every 501(c)(3) starts as a nonprofit. Not every nonprofit becomes a 501(c)(3). The gap between those two sentences is where most new organizations get stuck.
— 501c3 Expert
We handle all your 501(c)(3) paperwork — nonprofits set up from start to finish, and Form 990s prepared every year.
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