A new client of mine runs an online church that recently became a 501(c)(3). When I told my friend Bulus about it, he asked, "What exactly is a 501(c)(3)?" I gave a quick answer on the call. After checking the details, I need to correct part of it, which is a good lesson in itself.
The correction: it's a tax status, not a business type
On the call I listed LLC, S corp, C corp and 501(c)(3) as the kinds of business you can start. That's close but mixes two different things:
- Legal structure is created under state law: sole proprietorship, LLC, corporation, or nonprofit corporation.
- Tax treatment is a federal choice or status. An S corporation is a tax election an eligible LLC or corporation can make. A C corporation is the default tax treatment of a corporation. 501(c)(3) is a tax-exempt status granted by the IRS, usually to a nonprofit corporation organized for charitable, religious, educational or scientific purposes.
Can nonprofits make a profit?
Yes, they can bring in more than they spend. What's different is where the money goes. A 501(c)(3)'s earnings can't benefit private individuals like founders or insiders (beyond reasonable pay for real work). Surplus goes back into the mission. They also can't campaign for or against political candidates, and lobbying must be limited. In exchange, the organization generally doesn't pay federal income tax, and donors can usually deduct contributions.
Churches are a special case
Churches that meet the requirements are automatically treated as tax-exempt and aren't required to apply. Many choose to apply anyway (on Form 1023) for the certainty it gives donors. Most other charities must apply to be recognized.
Fiscal sponsorship
We also talked about fiscal sponsorship: an established 501(c)(3) agreeing to receive tax-deductible donations for a project that aligns with its mission, such as a community development project abroad, and overseeing how the funds are used. It's a common way for new projects to accept donations before (or instead of) forming their own nonprofit. The sponsor stays legally responsible, so these arrangements need a written agreement and real oversight.
If you're building a nonprofit, church or community project and need a website or tools to support it, see the AI & app building sessions. For formation and tax questions, work with a nonprofit attorney or CPA.
