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The Most Popular Types of 501(c)s
If you want to start a 501(c) organization, you should know the different options and the criteria for each type.
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If you’re planning to form a nonprofit organization, it’s important to understand that not all 501(c) groups are created equal. There are dozens of options, but some are more common than others. As a result, 501(c) exemptions tend to be misunderstood. Too often, people wonder how political groups or organizations like the National Football League are given tax-exempt status.
The problem is that when most people think of a tax-exempt organization, they picture corporations that have filed for 501(c)(3) status. However, there are several other kinds of 501(c) groups they may be unaware of. In this guide, you’ll learn the different types of 501(c) designations and get expert-backed tips for launching and maintaining tax-exempt status for your nonprofit organization.
What is a 501(c) organization?
A 501(c) organization is one of 29 different kinds of nonprofit organizations exempt from taxation. Under the law, such organizations are “organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt.”
Typically, when an organization solicits and receives monetary donations, the IRS gets a cut of the proceeds. The IRS views donations as taxable income unless those donations meet certain criteria. One criterion is that the donation was made to an eligible 501(c) charitable organization, making it tax-exempt.
Organizations that may fall under this regulation include any “community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes.” Other organizations that can be considered a 501(c) are those that foster national or international amateur sports and those that prevent cruelty to children or animals.
According to federal regulations, none of the earnings from these organizations can go to a single person, nor should the collected funds be used for political and legislative lobbying activities.
Any individual contributions made to a 501(c) can be tax deductible if the respective federal income tax return is itemized.
What is the difference between 501(c) and 501(c)(3)?
A 501(c) is any organization that falls within one of the 29 kinds of nonprofit organizations that are exempt from federal income tax. Each kind of 501(c) nonprofit addresses a different need or use, and a 501(c)(3) is one of those kinds.
“The key difference between a 501(c) and a 501(c)(3) is that 501(c) is the umbrella category for all tax-exempt organizations, while 501(c)(3) is specifically for charitable nonprofits that qualify for tax-deductible donations,” Tiffani Dhooge, president and CEO at the nonprofit Children’s Harbor Inc, told business.com. “Think of it like this: All 501(c)(3)s are nonprofits, but not all nonprofits are 501(c)(3)s.”
According to Benjamin Michael, founder of Michael & Associates, 501(c)(3)s are the “most common type of nonprofit organization … primarily because of the tax benefits that allow donors to write off their contributions.” Michael explained that securing this status involves more than just forming an organization; it requires taking steps like “naming the organization, solidifying its written purpose and bylaws, filing articles of incorporation, establishing a board of directors, and applying for the status at both the federal and state levels.”
Learn more about launching a 501(c)3 below.
What are other types of 501(c) organizations?
As mentioned above, there are nearly 30 kinds of 501(c) organizations. While the 501(c)(3) classification might be best known, here are some other options that may better fit your needs.
501(c)(4): Civic leagues, social welfare organizations and local associations of employees
A 501(c)(4) exemption is the most popular type after the 501(c)(3). Groups that promote social welfare qualify for a 501(c)(4) exemption, so organizations like volunteer fire stations and Rotary Clubs might seek a 501(c)(4) exemption.
However, these groups often get a bad reputation because they are technically allowed to lobby for the furtherance of whatever social mission they embody. As not everyone agrees on what benefits society, some 501(c)(4) organizations are seen as a political problem. Don’t write this kind of organization off, though: Many (c)(4) groups do good work.
Some donations to a 501(c)(4) are tax-deductible, but others aren’t. Usually, a (c)(4) has to disclose that information whenever it solicits donations.
501(c)(5): Labor, agricultural and horticultural organizations
Labor and agricultural unions typically seek a 501(c)(5) exemption. There aren’t many active unions registered with the IRS, but well-known labor organizations like Unite Here, United Auto Workers and the Teamsters all have 501(c)(5) exemptions.
Some people disagree with giving organized labor groups tax-exempt status, as some may have political agendas. But, the reasoning behind the decision is that these groups spend member dues to better the lives of the laborers and farmers they represent. Donations, or dues paid, are also typically deductible but as a business or trade expense rather than a charitable contribution.
>> Learn More: Marketing Challenges Only Nonprofits Understand
501(c)(6): Business leagues, chambers of commerce, real estate boards, etc.
501(c)(6) groups have another slightly controversial tax-exempt status since the organizations that qualify for it represent businesses that turn a profit. A 501(c)(6)-qualified group is typically an association of business owners who have united for a common purpose; such goals can include furthering the interests of their members within the local community or giving business owners a united voice to effect change.
The NFL, which has been under fire for its tax-exempt status, is a 501(c)(6). As with (c)(5) organizations, any dues paid or donations given to a (c)(6) do not qualify as tax-deductible charitable contributions.
501(c)(7): Social and recreational clubs
Only a few hundred 501(c)(7) groups are registered with the IRS. To qualify, the entity must be created solely for recreation or other social purposes. You’ll often see country clubs with a 501(c)(7) status. Though these entities do collect dues, any money coming in must be used in the best interest of the club’s members. Since no profit is generated, there is nothing to tax.
501(c)(8): Fraternal beneficiary societies and associations
Like (c)(7) organizations, 501(c)(8)-qualified groups are sustained by member fees and donations. Interestingly, the only fraternal societies that qualify for (c)(8) deductions are those that operate with a lodge or chapter system. They also need to prove they offer a system of support, like discounted insurance or death benefits, for their members and members’ immediate families. Fraternal societies that use a lodge system and don’t offer these benefits can still qualify for tax-exempt status, but they must apply for a 501(c)(10) exemption and devote their earnings to charitable causes.
How to launch a 501(c)(3) organization and maintain tax-exempt status
Every step, from defining your mission to achieving and maintaining tax-exempt status, counts if you want to run a successful 501(c)(3) organization. Follow these steps to ensure your nonprofit is built on clarity, strategy and compliance.
1. Define your mission.
You need a mission statement that “acts as your nonprofit’s North Star — unchanging, unwavering and guiding everything you do,” according to Robin Berlinsky, CEO of The Abundant Nonprofit.
“The best mission statements don’t need constant tweaks; they create movements, attract funding and rally people to your cause effortlessly,” she explained. “With a clear mission in place, you can confidently move forward in the filing process.”
By establishing a strong, unambiguous mission, you create a solid base for everything that follows — from filing the proper paperwork to engaging fully with your organization’s community.
2. Identify qualifying activities.
As you develop the mission for your nonprofit organization, you need a clear understanding of the kinds of activity it will conduct. As long as it traffics solely in one of the following categories, you will qualify for 501(c)(3) status:
- Religious needs
- Scientific study
- Educational services
- Public safety testing
- Charitable contributions
- Calling for the end of child or animal abuse
- The creation and continued support of a national or international amateur sports competition
3. Establish your corporation.
Once you know what your nonprofit will do, you must formally create a corporation at the state level. The process varies from state to state, so check with your state’s Department of Taxation before moving forward. After you file at the state level, file applications for an employer identification number (EIN) and to be a 501(c)(3) organization.
>> Read Next: Benefits of Forming an S Corporation
4. Maintain your tax-exempt status.
Again, a 501(c)(3) is limited in what it can do. If you want your nonprofit to retain its 501(c)(3) status, you must follow all federal and state guidelines. Failure to adhere to the rules laid out by the IRS can result in the loss of your organization’s tax-exempt status.
Faizan Younus, managing principal at NCheng LLP, which specializes in nonprofit accountancy, encouraged nonprofits to build the proper infrastructure from the start to ensure compliance.
“Regardless of which 501(c) designation an organization pursues, the key to success is staying on top of federal and state compliance requirements while maintaining transparent operations,” he said. “From drafting detailed bylaws to filing the right paperwork with the IRS, setting up a nonprofit demands an early and thorough commitment to governance and accountability.”
Plan to:
- Establish clear policies on financial management and put in place tight internal controls you regularly monitor.
- Define the roles and responsibilities of each board and staff member.
- Adhere to the rigorous reporting standards the IRS demands.
Achieving all three not only ensures you meet the necessary legal requirements but also earns your organization the trust of donors. The latter is vital to your nonprofit’s survival.
5. Always be promoting.
Once your 501(c)(3) is off the ground, you’ll find that marketing your organization can be just as important as maintaining legal compliance. Develop different strategies to reach the community your nonprofit serves and the audience from which you want to receive donations. With each campaign, analyze the results and refine your promotional strategies.
The one uniting factor for all tax-exempt, 501(c)-qualified entities is that the IRS keeps a close eye on their finances. If you’re considering forming a nonprofit entity, discuss your options with an attorney or tax expert. Though a 501(c)(3) exemption is the most popular, it may not suit your nonprofit. Choosing the right 501(c) designation for your mission will make compliance much easier and alleviate the worry of losing your tax-exempt status.
Mark Fairlie and Skye Schooley contributed to this article.
