Did you know organizations focused on for-profit businesses are also considered nonprofits? The Internal Revenue Service considers this type of nonprofit eligible for tax exemption under the Internal Revenue Code section 501(c)(6).
Suppose your organization's mission is to support businesses, and it fits the guidelines laid by the Internal Revenue Service. In that case, you can enjoy tax benefits and other advantages by securing a 501(c)(6) status.
This article explains section 501(c)(6), its benefits, drawbacks, and requirements, and provides a detailed registration guide.
Table of Contents
What is a 501c6 Nonprofit?
A 501c6 nonprofit organization is created by individuals with common business interests. The organization represents business interests rather than the public at large.
They typically include real estate boards, chambers of commerce, and business leagues. Contributions are eligible to be tax deductible.
501(c)(6) organizations' core purpose is to promote the common business interest of a larger group, usually business leagues, and improve their company processes. The organization cannot engage in any commercial transaction for profit.
To be eligible for federal tax exemption, the net earnings of a 501(c)(6) nonprofit organization must not benefit any private shareholder. The group cannot run any profitable activities.
Key Features of a Tax Deductible 501(c)(6) Organization
- Built for members: These organizations are designed to benefit their members, often including businesses, professionals, or organizations united by a shared industry or trade interest.
- Member-driven revenue: A significant portion of funding comes from membership dues and related fees, ensuring the organization remains focused on serving its network.
- Advocacy-friendly: Unlike 501(c)(3) nonprofits, 501(c)(6) organizations can engage in meaningful lobbying efforts to shape legislation, provided these activities support their stated purpose.
- Tax-advantaged membership: Membership fees are typically deductible as a business expense, giving members a financial incentive to participate while supporting their industry’s growth.
Examples of a 501(c)(6) Nonprofit Organization
Business Advocacy Networks
Business advocacy networks can be a state, national, or local chamber of commerce designed to uplift business communities, drive economic progress, and foster industry connections.
Example: U.S. Chamber of Commerce, known for shaping policies that benefit regular business.
Industry Trade Collectives
Industry trade collectives represent specific industries that offer advocacy, education, and collaboration opportunities to strengthen their sector.
Examples: the National Association of Realtors (NAR), which supports real estate professionals, and the American Beverage Association, which unites the beverage industry.
Professional Development Societies
Professional development societies empower individuals within particular professions by offering networking, training, and resources for career advancement.
Examples: the American Bar Association (ABA) for legal professionals and the National Society of Professional Engineers, which champions engineering innovation.
Collaborative Business Alliances
Collaborative business alliances are leagues of businesses focused on improving the operational environment for member businesses, whether in retail, manufacturing, or technology.
Example: National Retail Federation, a voice for commercial enterprises nationwide.
Real Estate Advocacy Boards
Real estate advocacy boards are associations that support and advocate for real estate professionals by promoting ethical practices, providing education, and influencing policy.
Example: Local boards tied to the National Association of Realtors, helping shape the housing market.
Athletic Leadership Organizations
These professional sports organizations and amateur sports leagues elevate their sport, connect players, and develop strategies to enhance the industry. Professional football leagues fall under this category.
Example: The National Football League, which champions football through leadership and education.
Specialized Industry Associations
Specialized industry associations are groups tailored to niche industries that provide insights, tools, and advocacy for member businesses.
Examples: Automotive Service Association for repair shops and service providers, and the National Restaurant Association, supporting dining establishments nationwide.
How to Establish a 501(c)(6)
When you establish your 501(c)(6) organization, you can begin uniting professionals, businesses, and leaders in your industry around a joint mission. It may take some time, but following the proper steps is essential to staying compliant and starting to operate smoothly with every box checked.
Here is a full walkthrough to secure a 501(c)(6) tax-exempt status:
1. Define Your Purpose
Draft a mission statement to answer why your charitable organization exists.
Questions to ask yourself:
- Who do you aim to help
- Why should people contribute to your organization?
Examples of mission statements for a 501(c)(6):
- "To promote economic growth and strengthen our business community by fostering collaboration, advocating for policy improvements, and providing resources that empower businesses to thrive."
- To advance the interests of the [industry name] by uniting professionals, advocating for beneficial policies, and providing business members with education, resources, and networking opportunities."
- "To support and elevate [profession name] by fostering innovation, offering professional development, and advocating for standards that uphold excellence and integrity."
From there, create bylaws that define your organization's purpose, structure, and operational guidelines. The next step is to name your organization, which may have different requirements in each state. Check local and state laws before moving ahead.
2. Recruit Members
As per the IRS requirements, you must secure memberships to be considered a 501(c)(6) organization. Member dues will be a significant part of your nonprofit's budget.
Here are some tips to recruit and retain members:
- Create a customized online membership form to make it easier for people to join your nonprofit. Zeffy's membership application form for nonprofits and associations allows you to manage applications, track member information, and generate membership cards, all in one platform for free.
- Offer valuable benefits that align with your organization's purpose and appeal to your target members. Consider providing exclusive resources, networking opportunities, and industry-related product discounts.
- Maintain strong communication with your members to keep them engaged and invested in your organization. Regular newsletters, events, and personalized outreach can foster a sense of community and loyalty.
By focusing on providing a seamless membership experience and offering tangible benefits, you can attract and retain a solid member base to support your 501(c)(6) nonprofit.
3. Assemble a Nonprofit Board
Your nonprofit board is a helpful body of individuals you can trust to infuse your new organization with its foundations and maintain its integrity as you grow.
Tips to choose nonprofit board members for professional associations:
- Align with mission: Ensure potential board members are passionate about and committed to the organization's goals and values.
- Diverse skill sets: Seek individuals with varied expertise, such as legal, financial, marketing, and industry knowledge, to bring a broad perspective to decision-making.
- Industry experience: Prioritize candidates with deep experience in the industry or trade your 501(c)(6) represents, ensuring they understand the challenges and opportunities within the field.
- Strong leadership qualities: Look for board members who are effective communicators and team players and have a track record of leading initiatives or organizations.
- Commitment and availability: Choose individuals who can dedicate the time and effort to attend meetings, contribute to strategic planning, and support the organization's activities.
- Reputation and integrity: Select board members with a solid professional reputation and ethical standards to build trust and credibility for your organization.
Choosing board members is a significant task as they will:
- Write your nonprofit bylaws
- Establish regulations
- Influence members
- Make strategic decisions
- Review the nonprofit's finances
- Create your 501(c)(6) nonprofit foundation
As the organization grows, the board's responsibilities also increase. You must find potential leaders who can fill the president, vice president, and other executive positions within the nonprofit's structure.
4. Submit the IRS Form SS-4 for State and Local Taxes
Apply for an Employer Identification Number using the Internal Revenue Service Form SS-4 to incorporate your nonprofit.
The EIN is a nine-digit number for every organization and individual registered in the United States. You can use it to file your taxes and claim tax deductible funds.
5. Acquire Articles of Incorporation
You need Articles of Incorporation to legally establish your 501 c 6 organization and make it an official entity in your state. These documents outline your organization's purpose and structure, which is necessary for applying for tax-exempt status with the IRS.
Without them, you can’t operate legally or protect your board members from personal liability. They’re a crucial step in getting your organization up and running.
Essential requirements to file articles of incorporation:
- Your nonprofit's official name. Understand your state's requirements for naming an organization before choosing a name.
- Your nonprofit's physical address.
- Registered agent's name and address. A Registered agent will receive all legal documents on your nonprofit's behalf. It can be an individual or a company with a physical location in your state.
- List of board officers and their addresses. An incorporator will sign your nonprofit's articles of Incorporation for your nonprofit. The incorporator may or may not be a board member.
- A clear purpose of your nonprofit. Use the exact wording of your purpose on all legal documentation you submit to the state and federal government.
- Please see the membership program details, as you must have members to qualify as a 501 c 6 organization.
- Your organization's start date. Usually, it is when your incorporation is approved. Some state departments may allow you to choose a different date.
Please note that the process may vary with state departments. For instance, in Pennsylvania, you must publish your intent to incorporate with two newspapers during the process. Ensure you know the ins and outs of starting a nonprofit to avoid any state-specific hindrances.
6. Apply for Tax-Exempt Status
Once you acquire the EIN and articles of incorporation, you can apply for a 501(c)(6) with the Internal Revenue Service. Filing for tax-exempt status as a 501 c 6 organization is vital because it lets your organization avoid paying federal taxes on member dues and activities.
This saves money and boosts your credibility, helping you attract members and partners. Plus, it keeps you in line with IRS rules, protecting your organization and its leaders from future legal issues.
You must submit Form 1024 with the required documents online or by mail.
The application must also include:
- Your nonprofit's purpose.
- List of your nonprofit's specific activities and other details.1
The purpose of the wording should be precisely as in the articles on incorporation. Any mistake can result in rejection from the Internal Revenue Service.
You must also provide financial statements, if applicable. These may include details of your nonprofit's ordinary business expenses, revenue, and proposed budget for the upcoming year.
Good to know : When submitting attachments, every attachment should show your organization's name and EIN. It should also state that it is an attachment to your application form and identify the part and line item number to which it applies.
7. Acquire your Determination Letter from the IRS
The letter of determination from the Internal Revenue Service is proof of your nonprofit's tax-exempt status. A determination letter is important because it officially confirms your 501(c)(6) tax-exempt status with the IRS.
It shows that your organization meets all the requirements, helping you build trust with members, donors, and partners. Plus, it keeps you compliant with IRS rules and can help avoid future legal or tax issues.
You must attach Form 8718 with Form 1024 when filing for tax exemption. The form will entail a fee of $600.
Once your application is approved, you will receive your letter of determination. You can then apply for an exemption from state and local taxes.
8. Connect with Local, County, and State Departments of Revenue
If applicable, ask the local authorities about additional requirements regarding your nonprofit's tax-exemption status. It can vary across states, and some do not offer tax exemptions.
501(c)(3) vs 501(c)(6)
The primary difference between 501(c)(3) and 501c6 nonprofits is the purpose of the organization. While a 501(c)(3) nonprofit organization works for charitable purposes, a 501c6 is a business or membership nonprofit.
Here are some differing factors between the two nonprofit types:
1. Purpose and Activity
501(c)(3) nonprofit organizations are primarily charitable organizations. They work for their community's benefit through activities which may include:
- Providing relief for the poor or the underprivileged
- Erecting or maintaining public buildings or monuments
- Advancement of religion, education, or science
- Reducing neighborhood tensions
- Social welfare organizations
- Eliminating discrimination
- Defending human and civil rights
- Combating community deterioration and child abuse
501(c)(6) organizations are typically business or trade associations focused on serving the interests of their members. They work to support their industry or profession through activities such as:
- Promoting economic growth and job creation within the industry
- Advancing industry standards and best practices
- Advocating for policies that benefit members or the sector as a whole
- Offering educational resources and professional development opportunities
- Facilitating networking and collaboration among members
- Enhancing the public image and reputation of the industry or profession
2. Tax-Exemption Status
Details for filing and organizing income for federal income tax purposes significantly differ between 501(c)(3) and 501(c)(6) nonprofits. While both get exemption from taxes, 501(c)(6) nonprofits may be required to pay state and local taxes. These are substantial taxes that can impact a nonprofit's plans.
Federal Income Taxes: Both 501(c)(3) and 501(c)(6) organizations enjoy tax deductions. This is a major perk for nonprofits, allowing them to focus their resources on their mission instead of sending money to the IRS. However, the type of activities they’re allowed to pursue under this exemption varies significantly:
- Tax exempt organizations with a 501(c)(3) must stick to a religious, charitable, educational, or scientific mission. They’re strictly limited regarding political involvement or lobbying—just a little is okay, but too much could jeopardize their organization's tax exempt status.
- Tax exempt organizations with a 501(c)(6), on the other hand, are built for advocacy. They exist to promote common business interests so they can engage in lobbying and even political campaign work related to their mission without much worry.
State and Local Taxes:
- 501(c)(3)s often get a free pass from state and local taxes, like property and sales taxes, as long as their federal tax-exempt status is recognized.
- 501(c)(6)s aren’t as lucky. Depending on the state, they might have to jump through extra hoops to qualify for these exemptions—or they might not qualify at all. This can mean unexpected tax bills that eat into their budget.
Donor Deductibility:
- 501(c)(3)s have a huge advantage here. When someone donates to a 501(c)(3), they can usually write that donation off on their taxes. That’s a big motivator for individuals and businesses to contribute.
- 501(c)(6)s don’t offer the same benefit. Charitable donations aren’t tax-deductible. The silver lining? Businesses can sometimes deduct membership dues or sponsorships as business expenses if they’re directly tied to their operations.
Business Activities and Taxes: Both organizations can face taxes if they venture into unrelated business activities (think a nonprofit running a coffee shop or selling products that aren’t tied to its core mission). This is called Unrelated Business Income Tax (UBIT):
- For 501(c)(3)s, the IRS is pretty strict about separating these activities from their main purpose. Too much-unrelated business income can raise red flags.
- 501(c)(6)s get a bit more wiggle room, as their “related purpose” can be interpreted more broadly, primarily when the income supports their members’ industry or trade.
Staying Compliant: No matter the type, nonprofits must play by the rules to keep their tax-exempt status.
- 501(c)(3)s face tighter scrutiny from the IRS. They must prove they’re serving the public good and avoid any appearance of benefiting individuals or groups who are privately funded.
- 501(c)(6)s also needs to avoid private inurement (funneling profits to insiders), but they have more flexibility in other areas, like lobbying.
Both must file annual paperwork (Form 990, anyone?) to stay in the IRS’s good graces. Missing filings or straying from their purpose can mean serious consequences, including losing their tax-exempt status—and no one wants that.
3. Funding Streams
Unlike 501(c)(6) organizations exempt from certain taxes, 501(c)(3) nonprofits are eligible to receive tax-deductible donations. These gifts are considered charitable contributions, which donors can report in their annual tax filings.
Tax deductions give 501(c)(3) nonprofits a fundraising advantage over 501(c)(6) nonprofits.
Both nonprofits can raise funds through membership fees, and 501(c)(6) can file them as business expenses.
Some examples of tax-deductible funding streams
To solicit donations, the IRS may need a 501(c)(6) nonprofit organization to be transparent that the donations are not tax deductible. The organization may also ask for a proxy tax for the membership fees it collects.
4. Reporting and Compliance
The IRS imposes strict reporting and compliance requirements for both 501(c)(3) and 501(c)(6) nonprofits. Although they do not pay federal taxes, 501(c)(3) and 501(c)(6) nonprofits need to file state and federal income tax returns.
They must also maintain records of all their financial activities for audit. Failure to fulfill these requirements can result in the suspension of both nonprofits' tax-exempt status.
Tips for 501(c)(6) organizations to remain compliant:
- Keep your mission front and center: Ensure everything you do supports your members’ common business interests.
- Stay on top of filings: Always file Form 990 on time to secure your tax-exempt status.
- Play fair with finances: Avoid letting profits or perks benefit insiders—it’s a quick way to get in trouble.
- Track lobbying activities: Lobbying is fine, but document it carefully to avoid overstepping.
- Be organized with money: For transparency, keep clear records of your income and expenses.
- Know your local rules: To stay compliant, follow state-specific tax and registration requirements.
- Focus on member benefits: Make sure your offerings, like events or training, clearly serve your members.
- Document key decisions: Regular board meetings with proper notes help show good governance.
- Stay current: Keep up with IRS updates to avoid surprises down the road.
5. Political Activities
501(c)(3) organizations can lobby for their initiatives and missions, but it should be limited to their organization's exempt activities. The IRS reinforces that a 501(c)(3) nonprofit cannot:
- Conduct activities to influence legislation
- Participate in campaigns of political parties
- Have business conditions in support a specific candidate's election to a local, state, or federal office
Privately funded organizations with 501(c)(3) status cannot lobby but can fund other nonprofit's lobbying activities. In contrast, 501(c)(6) nonprofits are free to participate in unlimited lobbying, given that it is related to their purpose.
They are also permitted to support or endorse political candidates. Members of 501(c)(6) nonprofit organizations should know the percentage of their dues invested in lobbying. If an organization does not notify its members, the IRS will levy a proxy tax penalty.
6. Grant Opportunities
Grants are charitable donations from the government, corporations, and private foundations. While both 501(c)(3) and 501(c)(6) nonprofit organizations require grants, the former is more dependent on them.
Several organizations offering nonprofit grants require grantees to be involved in charitable activities and have a tax-exempt nonprofit status. This offers an advantage to 501(c)(3) nonprofits, although some organizations permit 501(c)(6) nonprofits to apply for grants.
Why Should You File for a 501(c)(6) Nonprofit Status?
Securing 501(c)(6) status offers attractive benefits to nonprofits:
- Get tax exemption: Not having to file federal income tax gives you more control over business expenses. You can also use the saved money to grow your business and work toward improving company processes.
- Conduct unlimited lobbying and participate in political campaigns: Your lobbying activities are unlimited as long as they are related to your purpose. You can also actively participate in political activity.
- Protect donor information: A 501(c)(6) organization is not mandated to disclose donor information. If your donors prefer, you can keep their information confidential.
- More legitimacy: IRS-approved tax-exempt status gives more recognition and adds credibility to your advocacy activities.
You must also consider the drawbacks before applying, which include:
- No tax-deductible charitable donations, which impacts fundraising efforts
- Fewer chances of securing government and private grants
Final Thoughts on 501(c)(6)
501(c)(6) nonprofits have a significant role in advocating for business interests. They also encourage local, state, and national collaborations to boost their community's scope and growth.
If you are a nonprofit working for your community's common business interest, a 501(c)(6) designation can be advantageous. However, only after carefully understanding the benefits and drawbacks can you follow the easy steps to secure your tax-exempt status.
Zeffy's 100% free membership management software simplifies your membership programs. It allows you to easily manage applications, collect membership dues, generate membership cards, and track your organization's members—all at zero cost.
FAQs on 501(c)(6) Tax Status
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