Archive for November 5th, 2007

The many aspects of “non-profit”

November 5th, 2007

I’m often asked various questions about non-profits. Many people have a general idea of what “non-profit” means but very few have a specific, technical understanding. This makes perfect sense. The technical understanding is a legal and accounting mix, and specific to legal jurisdiction as well.

Here’s a brief outline of what “non-profit” means — in the technical, legal sense — to the Mozilla Foundation. It’s pretty dense stuff, and I’ll provide only the most basic summary. I think about this a lot but in this post I’ll try to stick to describing the structure.

I. “Non-profit” status

The Mozilla Foundation is legally identified as a “non-profit public benefit” organization under California law. Its property is “irrevocably dedicated to charitable purposes.” The Mozilla Foundation is governed by the California Nonprofit Corporation Law, which is somewhat different from California’s General Corporations Code. I’ve found that the distinctions between the general Corporations Law and the Nonprofit Corporation Law include structural elements — members instead of shareholders and so on, and a set of distinctions which I think of as designed to ensure that the organization is pursuing a non-profit goal rather than pursuing private gain.

II. “Tax-exempt” status

The Mozilla Foundation is also a tax-exempt organization as determined by the U.S. Internal Revenue Service. To be a tax-exempt organization one should be a non-profit organization (as described above), and the purpose of the organization must fit within additional specifications. Once this status is granted, a tax-exempt organizations is governed by a body of regulations and policies determined by the IRS. These regulations are in addition to any requirements imposed by the Nonprofit Corporation Law. These regulations identify permissible purposes for a tax-exempt organization. They also limit the kinds of activities in which a tax exempt organization can engage, especially for activities that generate revenue or that involve advocating for particular laws. In exchange for tax-exempt status, an organization lives with significantly more restrictions on the way it can operate.

III. “501(c)(3)” status

The Internal Revenue Service grants tax-exempt status to several different kinds of organizations. The Section of the Internal Revenue Code that describes the types of exemptions is Section 501. The most important one for our purposes is Section 501(c)(3). This section applies to organizations “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition . . . or for the prevention of cruelty to children or animals . . .”

The Mozilla Foundation is a 501(c)(3) tax-exempt organization dedicated to promoting the Internet as a universal, innovative platform accessible to all.

IV. “Public Charity” status

There are actually two types of 501(c)(3) organizations. One type receives significant contributions from the public — a “public charity” 501(c)(3). The other type is a “private foundation.” These are generally 501(c)(3) organizations where an individual or family contributes most or all of the money and the charity operates from these funds and the income they generate. Private foundations are required to spend a certain percentage of their funds each year, public charities are not. (There are also two types of private foundations, operating and non-operating.) The IRS reviews 501(c)(3) organizations periodically to see if they are public charities or private foundations. The Mozilla Foundation is currently a public charity 501(c)(3) organization.

For Further Detail

Each of these areas can become complex quickly. This is an area where it takes true experts to fully understand. Wikipedia has a nice overview article. The actual documents relating to the Mozilla Foundation can be found at the Mozilla Foundation website.

After living in this world for the last few years I have many thoughts about where this system works well and where it is unwieldy or even counter-productive. I’ll put those in a separate post before too long.

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