How to Structure a Nonprofit

For individuals or organizations launching a mission-driven entity, operating as a tax-exempt nonprofit can be a powerful way to pursue long-term goals while unlocking key benefits such as donor deductibility, grant eligibility, and exemption from federal income tax. However, before the IRS grants 501(c)(3) status, it must be satisfied that the organization is organized and operated exclusively for a qualifying exempt purpose. So, how to structure a nonprofit becomes critically important.

This post outlines the most common types of 501(c)(3) organizations—charitable, educational, and religious and explains how the organization’s governing documents, mission definition, and planned activities should be aligned to meet IRS requirements.

The Three Most Common 501(c)(3) Categories
Although the Internal Revenue Code includes several exempt purposes, most applications fall into one of the following three categories:

1. Charitable Organizations
Charitable organizations are among the most recognized types of nonprofits. The IRS defines “charitable” broadly to include activities such as relief of the poor and distressed, advancement of religion, promotion of health, and other efforts beneficial to the public.

Key considerations:

• The IRS seeks evidence that the organization will serve a broad community, not a private group.
• Fundraising strategies and service delivery plans should demonstrate how the organization will meet public needs at no cost or at reduced cost.

Examples: Food banks, homeless shelters, disaster relief programs, public health initiatives.

2. Educational Organizations
Educational organizations include entities that provide instruction, structured training, or public education. It is not sufficient to merely share information; the organization must demonstrate an educational methodology.

Key considerations:

• The IRS expects to see a structured program, a defined curriculum, qualified instructors, or a planned series of educational activities.
• For online educational nonprofits, content must meet established educational standards and avoid primarily commercial objectives.

Examples: Literacy nonprofits, tutoring programs, adult education centers, public seminar
series.

3. Religious Organizations
Religious organizations may include churches, mosques, synagogues, and other faith-based
 entities. These organizations may qualify for tax exemption even if their activities differ from
 traditional worship.

Key considerations:

• The IRS evaluates factors such as regular worship services, a distinct religious history, established doctrine, recognized religious leadership, and an identifiable congregation.
• Although churches are not required to apply for 501(c)(3) status, it is often recommended for religious organizations that seek broader recognition or intend to operate programs beyond standard religious services.

Examples: Churches, faith-based schools, religious charities, interfaith outreach groups.

Why Structure Matters for IRS Approval
When applying for 501(c)(3) status, an organization must align its legal documents and
operational plans with one or more qualifying categories. The IRS will review the following:

• Articles of Incorporation to confirm the organization’s stated purpose qualifies under federal tax law
• Bylaws to ensure the governance framework supports public accountability and nonprofit principles
• Form 1023 and supporting documents to verify that planned activities, funding, and governance are consistent with the organization’s stated mission

Applications are often delayed or denied when:

• The organization’s purpose is described too vaguely (for example, “to uplift the
  community”)
• Activities appear commercial in nature, such as fee-based services without public benefit
• Services are limited to private individuals or members, rather than the public

Tips for a Strong Application

• Use precise language in the mission statement. Clearly identify the population served and the specific method of service.
• Avoid private benefit. Ensure that no individuals or insiders stand to profit from the organization’s operations.
• Present a realistic and mission-aligned budget. Expenditures should directly support exempt purposes.
• Include IRS-required language in governing documents. Articles of Incorporation must contain clauses regarding charitable purpose and proper dissolution of assets.

How to Structure a Nonprofit – Conclusion:
Obtaining 501(c)(3) status is more than a paperwork exercise. It requires a clearly structured organization with a mission that aligns with federal tax-exempt standards. Whether an organization seeks to provide education, deliver charitable relief, or advance religious purpose, proper structure and documentation are key issues to create and maintain a non-profit organization.

If you or your client are considering forming a tax-exempt organization, the experienced tax and compliance attorneys at RJS LAW in San Diego can help. We provide guidance regarding the type of exempt status most suitable to accomplish your goals, form the entity, and apply for tax-exempt status with the IRS. To schedule a complimentary consultation call us today at (619)-595-1655 or visit RJS LAW on the web. 

Written by Chandara Diep, Esq., LL.M.