A nonprofit organization serves the public interest and is exempt from federal income taxes. Volunteerism and helping the public are activities that date back centuries, with church missions to help the poor and disadvantaged. In the United States, the general public's interest in nonprofit and volunteer activity grew particularly strong during and after the Civil War. By the turn of the 20th century, many nonprofit organizations were in full operation, including the American Red Cross, and wealthy industrialists such as Andrew Carnegie and John D. Rockefeller were paving the way for today's philanthropic practices.

The Internal Revenue Service (IRS) classifies nonprofits with certain codes based on their purpose. In general, tax-exempt organizations are classified as 501(c) organizations. The purposes that nonprofits have vary widely. Their mission may be charitable, religious, educational, scientific, literary, testing for public safety, fostering international or national amateur sports competition, or the prevention of cruelty to animals or children. The IRS lists 26 different types of nonprofit organizations.

A charitable organization is a 501(c)(3) organization, and is defined as “charitable” because its purpose benefits the broad public interest, and not just its members. Nonprofits may be incorporated or unincorporated, with the difference being that the IRS will not grant 501(c)(3) status to unincorporated nonprofits. In addition, donations to 501(c)(3) organizations are tax deductible. As the Independent Sector, a resource group for the nonprofit industry, describes it, a public charity receives “at least one-third of its annual income from the public, a unit of government, or an organization formed to raise money for a special school, hospital, governmental unit, or publicly supported charity.” Private foundations, on the other hand, are supported by contributions from an individual, family, or corporation.

The federal government e...