%20Organization%20Your%20Detailed%20Guide%202.avif)
Are you looking to start a nonprofit organization but unsure about the tax implications?
501(c) is a section of the Internal Revenue Code that grants tax-exempt status to various types of nonprofits.
This guide explains the different 501(c) categories, their requirements, and the benefits and drawbacks of each status. You'll also learn the step-by-step process of establishing a 501(c) organization and how to choose the right category for your nonprofit's mission and goals.
Table of Contents
What is 501(c)?
501(c) is a section of the Internal Revenue Code (IRC) that grants tax-exempt status to certain types of nonprofit organizations. The 501(c) tax exemption enables nonprofits to focus more resources on their charitable or social purposes by reducing their tax liability.
The government encourages nonprofits to support the public good through this exemption. In the Internal Revenue Code, you'll find the activities allowed for each subsection to maintain tax-exempt status.
10 Types of Nonprofits Under the IRS 501(c) Section for Tax Exemption
The IRS publication 557 lists the details of all 501(c) organizations. Here are some of the most common types of nonprofits under this section:
IRS 501(c) SubsectionsNPO TypeFormCost501(c)(3)Organizations funds or foundations that work for religious, charitable, scientific, literary, or educational purposesIRS Form 1023 or Form 1023-EZ Annual - IRS Form 990$600 or $275501(c)(4)Social welfare organizationsIRS Form 1024 or Form 1024-A Annual - IRS Form 990$600 or a user fee of $50501(c)(5)Labor agricultural or horticultural associationsIRS Form 1024 Annual - IRS Form 990$600501(c)(6)Business leagues like Chambers of Commerce, Real estate boards, Professional football leagues, allowed to participate in for-profit activities focusing on the industry's improvementIRS Form 1024 Annual - IRS Form 990$600501(c)(7)Social or recreational clubs like Hobby groups, Country clubs, Sororities and fraternities, Sports clubs and competition leaguesIRS Form 1024 Annual - IRS Form 990$600501(c)(8)Lodge organizations or fraternal societiesIRS Form 1024 Annual - IRS Form 990$600501(c)(9)Voluntary Employees' Beneficiary Associations (VEBA), Includes members of the labor union who voluntarily donateIRS Form 1024 Annual - IRS Form 990$600501(c)(10)Fraternal associations that support outside causes but are not required to provide benefits to the membersIRS Form 1024 Annual - IRS Form 990$600501(c)(13)Cemeteries and other entities that provide burial and cremation servicesIRS Form 1024 Annual - IRS Form 990$600501(c)(19)Veterans' organizationsIRS Form 1024 Annual - IRS Form 990$600
In general, a 501c organization is exempt from paying federal income taxes. However, there are several different kinds of organizations under that status.
1. 501(c)(3)
501(c)(3) organizations must be organized and operated exclusively in accordance with the IRS standards. The most common type of nonprofit, 501(c)(3) organizations serve purposes such as:
- Charitable
- Literary
- Educational
Section 501(c)(3) nonprofits are of two different types:
Public Charities
These organizations can apply for grant funding from the government and private organizations. These funds support initiatives such as running a homeless shelter or providing medical care to the poor.
Private Foundation
Private foundations are 501(c)(3) nonprofits funded by a single person, family, or business for charitable purposes. The initial donation is invested to generate income, which is then distributed as grants to individuals or other charities.
Note: A nonprofit can work without the tax exemption and receive donations, but 501(c)(3) organization status has added benefits.
Filing Form 1023 or Form 1023-EZ is required to apply for the nonprofit 501(c)(3) tax exemption status.
2. 501(c)(4)
501(c)(4) organizations are tax-exempt nonprofits focusing on social welfare. While 501(c)(4)s can engage in political advocacy and lobbying, donations to these organizations are not tax-deductible for donors.
Here are things to consider when applying for a 501(c)(4) status:
- It must promote social welfare activities and programs to help the poor, unemployed, and marginalized with healthcare, empowerment, housing, etc.
- It must dedicate its earnings to support these welfare activities.
- It must involve non-commercial activities that are not directly for charitable purposes.
- The political activities allowed can't be the primary activity of such tax-exempt organizations.
Check the IRS Form 1024 or Form 1024-A to file for tax-exempt status under this category.
3. 501(c)(5)
501(c)(5) organizations involve labor, agricultural, and horticultural activities, gaining tax exemption by working for community betterment in these areas.
Labor organizations educate members and improve work conditions, while agricultural and horticultural organizations support animal welfare and agricultural activities.
Unlike 501(c)(3)s, donations to 501(c)(5)s are not tax-deductible for donors.
4. 501(c)(6)
501(c)(6) organizations promote business and improve processes for their members, focusing on common business interests rather than the general public. These organizations cannot engage in commercial activities for profit.
As the Internal Revenue Code defines, 501(c)(6) organizations cover:
- Business Leagues
- Chambers of Commerce
- Real Estate Boards
- Boards of Trade
- Professional Football Leagues
Attach Form 8718 to Form 1024 with the application to receive their Letter of Determination, which is the proof of your tax-exempt status.
5. 501(c)(7)
All social or recreational clubs fall under the 501(c)(7) category for the tax-exempt status. By the IRS definition, these social clubs focus on activities organized for pleasure, recreation, and other nonprofitable purposes.
Here are some examples of 501(c)(7) nonprofits:
- Sports clubs and competition leagues
- Hobby clubs
- Country clubs
- Dinner clubs
- Homeowners associations
- College fraternities and sororities
- Variety clubs
501(c)(7) organizations, such as social and recreational clubs, serve their members by pooling funds for shared activities. Members often join to develop leadership skills and learn about running an organization.
Social clubs can submit Form 1024 to apply for IRS tax-exempt status formally, but it is not mandatory.
6. 501(c)(8)
501(c)(8) organizations are lodge or fraternal societies. Their activities revolve around providing members with the payment of life, sickness, accident, or other benefits.
For example, college fraternities Formed based on religion, previous members, or common interests can register 501(c)(8)s for tax exemption.
To register for 501(c)(8) tax-exempt, a nonprofit must fill out IRS Form 1024.
7. 501(c)(9)
501(c)(9) nonprofits are Voluntary Employees' Beneficiary Associations (VEBA). It consists of employees or labor union members who donate voluntarily.
The main purpose of a 501(c)(9) organization is to:
- Give benefits related to health, life, or accidents.
- Support the well-being of its members through these benefits.
Nonprofits seeking qualification under 501(c)(9) must:
- Provide its members, their dependents, or their designated beneficiaries with insurance or similar benefits.
- Not aim to make profits for owners or shareholders.
- Include a non-discrimination clause and ensure members will get equal benefits regardless of their earnings.
8. 501(c)(10)
501(c)(10) organizations are domestic fraternal societies that operate under a lodge system. These organizations do not provide benefits to members but support external causes.
They aim to support religious, charitable, educational, scientific, literary, or fraternal activities. 501(c)(10) organizations get involved in activities supporting community service projects, offering educational scholarships, or organizing recreational activities.
Like other associations, you must apply for 501(c)(10) status using IRS Form 1024.
9. 501(c)(13)
501(c)(13) organizations include cemeteries and related entities. These organizations must use all revenue to maintain their facilities and provide burial, cremation, and related services. They can provide monuments, markers, flowers, vaults, and other funeral items.
10. 501(c)(19)
Section 501(c)(19) is for veterans' organizations, with at least 75% of their members being past or present United States Armed Forces members.
Any trust or foundation can get 501(c)(19) status if it works only for the Armed Forces. This means its activities must focus on improving the lives of veterans or current armed forces members.
Pros and Cons of a 501(c) Organization
ProsCons
- Tax-exempt status
- Increased credibility and trust among donors and other stakeholders
- Better possibility for securing grants
- Potential tax-deductible charitable contributions to motivate more donors
- Additional fees and application process
- Annual reporting to maintain the status
- Limits on activities and operations
- Mandatory to disclose financial reports to the public and other stakeholders
Benefits of Starting a 501(c) Organization
- Tax-exempt status: 501(c) organizations, or a tax exempt nonprofit organization, get exemption from federal income tax. This boosts their financial stability, allowing them to keep more funds to support their mission and cause.
- Increased credibility and trust: The label gives donors, grantors, and the public the confidence to associate with the organization, especially if it has recognition from the government as a legitimate charity.
- Eligibility for grants: Many grants ask for the organization's 501(c) status for eligibility. Having an IRS status means you can apply to fund your nonprofit with confidence.
- Potential for tax-deductible donations: Tax deductibility of contributions is a significant incentive for donors when choosing to support a 501(c) organization.
Drawbacks of Getting 501(c) Status
- Application process and fees: The 501(c) registration process and fees can be challenging for some nonprofits, especially small organizations with limited resources.
- Must fulfill reporting requirements: 501(c) organizations must maintain and submit detailed annual reports to the IRS. Any lag or gap can lead to non-adherence and loss of tax-exemption status.
- Restrictions on activities: Some organizations with 501(c) status restrict lobbying and political campaigns and advocacy. This can limit an organization's activities, especially those that advocate for changes in public policy.
- Public disclosure of financial information: 501(c) nonprofit organizations must make their financial information publicly available to maintain transparency. This mandates nonprofits to publicly disclose copies of their IRS Form 990, 990-PF, 990-EZ, and 990-N returns through the IRS website.
5-Step Process to Obtain 501(c) Status
Step1: Research and Find Your Purpose
Define your nonprofit's tax purposes by aligning them with your mission and cause. Consult with stakeholders and experts to ensure clarity and compliance on the topic.
Consider answering these questions to understand the purpose:
- Who will you support with your nonprofit's services?
- What is your mission statement?
- How does your vision align with the mission?
- What are the short-term and long-term goals of your organization?
- Will it create an impact in the local community, nationally or internationally?
- How will you accomplish your goals?
- What will be your fundraising plan for running the organization?
Step 2: Form a Board
Forming a board is an essential requirement under most state laws and the Internal Revenue Code. Forming a board involves the following:
- Decide on the number of board members. Most states require a minimum of three members.
- Outline the expectations and responsibilities of these board members.
- Appoint a board of directors, considering their skills, experience, interest, and passion for your mission.
Step 3: Create Bylaws
Hold the initial board meeting to discuss and draft bylaws. These rules will include how your organization will operate internally, outlining its:
- Organizational structure
- Meeting process
- Elections
- Powers and duties of board directors
- Voting rights
- Other internal organizational policies
Step 4: File Paperwork
Nonprofit paperwork will mainly involve the following:
- File for Articles of Incorporation: This document contains the basic details of your nonprofit and legally registers your organization with the state.
- Employer Identification Number (EIN): Visit the official Internal Revenue Service website to register for the EIN. Use IRS Form SS-4 to identify your organization for federal income tax purposes for the EIN.
- Internal Revenue Service Form for 501(c) Status: Identify your category and file the correct status from the list of the tax-exempt organizations.
Step 5: Submit Returns and Reports
Charitable organizations or nonprofits must file tax returns annually to maintain their status. For this, you will need Form 990, which you should make publicly available to maintain financial transparency.
Choosing the Right Category for Your Tax-Exempt Organizations
Mission and Purpose
Research and compare your nonprofit's mission and purpose with various 501(c) categories, focusing on organizations similar to yours to determine the most appropriate classification.
If you're confused, consult a federal income tax, business, or law expert to get advice for maximum benefits.
Take Time to Start the Paperwork
Before starting the application process, invest time in understanding the implications of your chosen 501(c) category for your nonprofit's bylaws and operations.
Find an Early Sponsor
Partnering with existing nonprofit charities can provide insights into the most suitable 501(c) category for your organization and streamline the application process by maintaining detailed records of activities and finances.
The Bottom Line on 501(c) Organizations
Understanding the intricacies of 501(c) organizations is crucial for ensuring your nonprofit's success and compliance with IRS regulations. The right choice can make a significant difference in your organization's ability to secure funding, maintain transparency, and achieve its objectives.
Choose Zeffy's 100% free nonprofit solution that can help your organization. Streamline your 501(c) nonprofit's operations with Zeffy's comprehensive fundraising platform.
FAQs on 501(c) Organizations
