Starting a nonprofit organization requires choosing the right type of nonprofit structure. Two of the most often explored nonprofit types are the 501(c)(3) and the 501(c)(6). Which one is best for your situation ultimately depends on the focus and goals of your planned organization services. By meeting with an experienced attorney for nonprofit organization services, you can get a clearer idea of which one is most appropriate for your needs.
What Is a 501(c)(3) Organization?
A 501(c)(3) organization is a nonprofit established for charitable, scientific, or religious purposes. Underlying the mission of these charitable organizations is a stated commitment to the greater good of society. It is because of this commitment that these organizations enjoy tax-exempt status. Some recognizable examples of 501(c)(3) charitable organizations include the United Way, Catholic Charities USA, and the Boys and Girls Club of America.
Most 501(c)(3)s are privately funded. However, an organization can file an exception with the Internal Revenue Service (IRS) in order to qualify as a publicly funded 501(c)(3).
Legal Requirements for 501(c)(3)
To obtain 501(c)(3) status, organizations must fulfill certain requirements:
- Officially become an association, corporation, or a trust
- Refrain from supporting or endorsing political parties and candidates
- Refrain from extensive political lobbying
- Exist to benefit society
- Not generate income unrelated to the nonprofit's mission
One of the main benefits of the 501(c)(3) status is the ability to offer tax deductions for those who support the organization with donations and gifts. These organizations can also receive grants and charitable contributions from government agencies and private foundations.
What Is a 501(c)(6) Organization?
A 501(c)(6) is an organization that promotes or addresses a specific common business interest. City chambers of commerce are common examples of 501(c)(6) organizations, as are professional organizations like the American Medical Association and the National Football League. Other examples of 501(c)(6) organizations are business leagues and boards of trade.
While a 501(c)(6) may benefit the public, the mission of this type of organization is to address the shared interests and concerns of its members. Hence, 501(c)(6) organizations depend heavily on member contributions, which members may deduct from their taxes as business expenses. Contributions to a 501(c)(6) are not considered charitable contributions.
Legal Requirements for 501(c)(6)
The legal requirements for forming a 501(c)(6) organization include:
- Have a reason for existence related to professional organizations, business leagues, or boards
- Operate based on membership
- Conduct operations to promote the common business interests of members
- Fulfill all federal, state, and local laws relating to nonprofit organizations
- Operate with complete transparency
- Refrain from activities that generate substantial business profit
- Refrain from allowing revenue to benefit private parties
One of the main advantages of the 501(c)(6) status is the ability to engage in unlimited lobbying.
501(c)(6) vs. 501(c)(3): An Overview
Top 10 Differences Between 501(c)(3) and 501(c)(6) Organizations
1. Tax Exemption Status: Understanding the Difference
One of the principal differences between 501(c)(3) and 501(c)(6) organizations is their tax treatment. Both enjoy exemption from federal taxes. However, 501(c)(6) organizations may be required to pay state and local taxes, unlike 501(c)(3) organizations.
The benefits of federal tax exemption cannot be overstated. The money saved can be invested back into the organization. The same holds for state and local taxes. But remember that 501(c)(6) organizations must sometimes pay state and local taxes, depending on their location. And in many cases, these taxes are substantial and can heavily impact an organization's plans and operations.
Also important to remember is that the IRS can revoke a group's tax-exemption status for failing to comply with IRS rules for nonprofits.
2. Income Sources: Exploring Funding Streams
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501(c)(3) organizations can receive tax-deductible donations and gifts. However, 501(c)(6) organizations cannot. Both types of organizations may receive revenue from membership fees, and members of 501(c)(6) nonprofits can write these fees off as business expenses. Both organizations may also receive revenue from providing products and services.
Sometimes, the IRS may require a 501(c)(6) organization to announce and report to the public that the donations and fees it receives are not tax deductible. The IRS may also require that the organization pay a proxy tax for the fees that the organization collects.
Organizations that employ the services of an experienced New York lawyer will have the guidance and advice they need to ensure they pay only the taxes they are liable for.
3. Reporting and Compliance: Meeting Requirements for Both
Both 501(c)(3) and 501(c)(6) organizations have strict reporting requirements and obligations as well as compliance requirements. Even if they do not pay federal taxes, both must file federal and state tax returns. Additionally, both types of organizations must maintain proper records reflecting all financial activity.
Failure to comply with reporting and record maintenance requirements can lead to the revocation or suspension of an organization's tax-exempt status. For this reason, it is important to work with an experienced New York nonprofit lawyer. With a lawyer handling reporting and compliance, an organization can avoid running into legal issues and preserve its tax-exempt status.
Software and office tools can also be of help with compliance. But nothing can replace the guidance from a seasoned nonprofit attorney.
4. Limitations and Restrictions: Navigating Legal Boundaries
The tax-exempt status offered with nonprofit designations comes with restrictions and limitations. Failure to heed them can lead to a loss of tax-exempt status. Working with an experienced New York lawyer will help an organization remain within legal boundaries.
For 501(c)(3) organizations, the main legal boundaries concern political and lobbying activities. These organizations are not permitted to endorse political candidates and must sharply limit their lobbying efforts. But 501(c)(6) organizations do not have these limitations on political activity and lobbying.
Organizations must always remain aware of the limitations or risk losing their designations. Attorneys are indispensable for many organizations in this respect. But regular reflection and meetings on the group's purpose and mission can help keep a tax-exempt organization from wandering out of bounds.
5. Mission: Clarifying Organizational Objectives
One key difference between a 501(c)(3) and 501(c)(6) is the organization's mission objective. Generally, the mission objective of a 501(c)(3) organization is to address a specific public need.
On the other hand, 501(c)(6) organizations have goals that are related to businesses and industry. As such, a 501(c)(6) is not a charitable organization.
The line can sometimes blur between the two, so it makes smart sense to rely on the services of a New York nonprofit lawyer for guidance. In every case, organizations with well-defined missions tend to stay focused on their tasks and garner the most public support.
6. Tax Deductible: Implications for Donors
Both 501(c)(3)s and 501(c)(6)s can raise money and receive donations, but funds given to 501(c)(6) organizations, while also tax-exempt, are different. They are typically business-oriented, focusing on networking and professional development.
Contributions to these organizations are not deductible for federal income tax purposes as charitable contributions, and they must disclose this fact in fundraising materials.
A misunderstanding of the rules relating to tax deductions and donors can lead to a loss of tax status as well as a loss of vital public support. So it is always recommended that 501(c)(3) and 501(c)(6) organizations work with experienced New York nonprofit lawyers when navigating the Internal Revenue Code.
7. Lobbying and Campaigning: Rules and Regulations
The IRS is clear on its rules relating to nonprofits and lobbying and political activities. Generally speaking, 501(c)(6) organizations have more latitude when it comes to engaging in activities of this nature. They are allowed to engage in unlimited lobbying and may also support and endorse political candidates.
On the other hand, a 501(c)(3) organization should not engage in unlimited lobbying activities. Doing so risks the loss of tax-exempt status and likely runs outside the organization's mission statement.
To remain compliant while advocating for political and legal change, nonprofits need an experienced New York lawyer to help them strategize and remain within bounds.
8. Application Process: Steps to Obtain the Designation
The application process is clear but lengthy and should be completed with the aid of an experienced New York lawyer. Errors lead to delays and loss of resources.
The steps to take include:
- Become a trust, corporation, or an association
- Obtain an employer identification number (EIN) by filing Form SS-4
- Define the purpose of the organization
- Establish a board of directors
- Establish a member base
- File articles of incorporation
- Apply for tax-exempt status
- Receive your determination letter from the IRS
- Contact the local and state departments of revenue in your jurisdiction
The process can be tedious and requires meticulous attention to detail to get things right the first time. Seek help from an attorney to ensure things go smoothly.
9. Grants: Opportunities for Funding Support
Grants are funds given by governments, businesses, and other organizations. Many 501(c)(3) and 501(c)(6) organizations depend on grants for much of their operating expenses, with 501(c)(3)s being more dependent upon them.
Many organizations that offer grants require grantees to not only have tax-exempt status but also be organized for charitable, religious, educational, or scientific purposes. In practice, this means that most grants are only available for 501(c)(3) organizations. That said, there are some funding organizations that allow 501(c)(6) organizations to apply for grants.
New York nonprofit lawyers are well-versed in the requirements and limitations of many grant-giving organizations and are of great help to groups in identifying appropriate fundraising opportunities.
10. Public Perception and Trust: Impact of Organizational Classification
Public perception can be instrumental in an organization's success or failure. Because of this, successful organizations typically devote significant resources and time to maintaining a positive public image.
Nonprofit organizations do not pay federal income taxes. They also solicit charitable donations from the public, especially 501(c)(3) organizations. For this reason, the public holds them to high standards of trust.
To foster this trust and acceptance, nonprofits should always regularly communicate with the public and those they serve. They should make their operations and plans transparent and provide open access to information when any issue arises.
New York nonprofit attorneys can support nonprofits in this respect by helping their client organizations remain compliant and fulfill their mission statements and objectives.
Get Professional Help: Hire a Lawyer for Your 501(c)(6) or 501(c)(3) Organization
Should you choose to operate as a 501(c)(3) or a 501(c)(6) organization? It depends on whether you want to serve the general public or business and industry.
Can donors write off contributions to a nonprofit? Donors to 501(c)(3)s can, while a donation to a 501(c)(6) might be labeled as a business expense.
Whatever your nonprofit goals, Lawyer For Business can help you navigate complex regulations. Contact us today for a consultation.
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Empower your nonprofit vision. Get in touch with our non-profit lawyer to discuss which classification suits your goals and mission!
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