Did you know organizations focused on for-profit businesses could also be nonprofits?
The Internal Revenue Service considers such organizations eligible for tax exemption under the Internal Revenue Code section 501(c)(6).
If your organization's mission is to support businesses and it fits the guidelines laid by the IRS, you can enjoy tax benefits and many other advantages by securing a 501(c)(6) status.
This article sheds light on what section 501(c)(6) is, its benefits, drawbacks, requirements, and a detailed guide on how to register.
Table of Contents
What is a 501(c)(6) Nonprofit?
A 501(c)(6) nonprofit is created by a group of 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.
501(c)(6) organizations' core purpose is to promote the common 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 must not benefit any private shareholder. The group cannot run any profitable activities.
How to Establish a 501(c)(6)
Here is how you can secure a 501(c)(6) tax-exempt status:
1. Define Your Purpose
Draft a mission statement to answer why your nonprofit exists. Who do you aim to help, and why should people contribute to your organization?
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.
Collect 501c6 membership payments with Zeffy
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 help 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 strong member base to support your 501(c)(6) nonprofit.
3. Assemble a Nonprofit Board
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 responsibilities of the board also increase. You must find potential leaders who can fill the shoes of president, vice president, and other executive positions within the nonprofit's structure.
4. Submit the IRS Form SS-4
Apply for an Employer Identification Number using the IRS 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-exemption.
5. Acquire Articles of Incorporation
Here are some 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.
- 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 how to start 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) tax-exempt status with the IRS.
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 exactly as in the articles on incorporation. Any mistake can result in rejection from the IRS.
You must also provide financial statements if applicable. It may include details of your nonprofit's ordinary business expenses, revenue, and the proposed budget for the upcoming year.
7. Acquire your Determination Letter from the IRS
The letter of determination from the IRS is proof of your nonprofit's tax-exempt status. 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 exemptions.
501(c)(3) vs 501(c)(6)
The purpose of an organization is the primary difference between 501(c)(3) and 501(c)(6) nonprofits.
While a 501(c)(3) nonprofit organization works for charitable purposes, a 501(c)(6) 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.
- Eliminating discrimination.
- Defending human and civil rights.
- Combating community deterioration and child abuse.
2. Tax-Exemption Status
Tax treatment significantly differs between 501(c)(3) and 501(c)(6) nonprofits. While both get exemption from federal income 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.
As the organizations are exempted from federal taxes, both nonprofits can save a lot for their initiatives.
If they are unable to comply with the accompanying requirements, nonprofits can get their status revoked by the IRS.
3. Funding Streams
Unlike 501(c)(6) organizations, 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) nonprofits can file them as business expenses.
To solicit donations, the IRS may need a 501(c)(6) nonprofit organization to be transparent that the donations are not tax deductible. It may also ask for a proxy tax for the membership fees that 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 lead to suspension of tax-exempt status for both nonprofits.
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.
- Support a specific candidate's election to a local, state, or federal office.
Private foundations 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.
501(c)(6) nonprofit organization members should know the percentage of dues invested in lobbying. If any 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) nonprofits 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: There are no limitations on your lobbying activities as long as they are related to your purpose. You can actively participate in political activity, too.
- Protect donor information: For a 501(c)(6) organization, there's no mandate 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 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. Follow the easy steps to secure your tax-exempt status only after carefully understanding the benefits and drawbacks.
Zeffy's 100% free membership management software simplifies your membership process, allowing 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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