Why everyone wants to be a 501(c)3 | SBDC UNF

Give Us A Call Today! | (800) 450-4624

Why everyone wants to be a 501(c)3

501(c) is a provision of the United States Internal Revenue Code. It lists twenty-seven types of nonprofit organization exempt from some Federal income taxes. There are many kinds of nonprofits as specified by the Internal Revenue Service (IRS).

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.

Organizations described in section 501(c)(3) are commonly referred to as charitable organizations. Organizations described in section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions.And that is what all the fuss is about! If an individual or a corporation wants to give your organization money, it can be written off on their taxes. Only 501(c)3’s have this advantage so that is why it is so popular!

Due in part to misleading advertising from the likes of Matthew Lesko and National Grants, I find clients coming in for counseling that are obvious for-profit startups (like a dry cleaning business) asking if they should be a nonprofit or a for profit? Once you tell them that they can not own the entity and, if they become the executive director, they can be fired by the board of directors, they tend to move on!

Other nonprofit designations of interest:
501(c)(4) exemptions are given to civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes. 501(c)(4) organizations differ from 501(c)(3) in that they are permitted to lobby for legislation. (think NRA, MoveOn, AARP)

A 501(c)6, for example, is a business league devoted to the improvement of business conditions of one or more lines of business. It is not engaged in any regular business typically carried on by for-profits. Trade associations and professional associations are considered to be business leagues. The stated mission of a 501(c)(6) organization must focus on the advancement of the conditions of a particular trade or the interests of the community. Your local chamber of commerce is a 501(c)6

A 501(C)10 is a category for fraternal organizations including Freemasons, Kiwanis, the Shriners and Rotary Clubs.

You can find a complete list of all the types of nonprofit at the Tax-Exempt Organization Reference Chart .

For detailed information on a wide array of nonprofit regulations that are informative, (IRS, postal, etc.) check out the Online Compendium of Federal and State Regulations for U.S. Nonprofit Organizations

Many people are surprised to learn that religious organizations are a wild card when it comes to nonprofit status. Churches have the option of incorporating and/or becoming a 501(c)3. If they meet the criteria of a 501(c)3 they do not have to apply to the IRS for the privilege!

« »
SBDC Footer Shadow Background