Soapbox Engage Blog

Are you thinking about starting a nonprofit? There’s so much to think about and consider! If you're located in the United States, one of the most important early decisions you’ll have to make is what type of the Internal Revenue Service's (IRS) 501(c) categorization will best suit your nonprofit.

There are actually 27 different types of nonprofit organizations that cover everything from cemetery companies to benefit trusts and everything in between! Most charitable organizations fit into one of three 501(c) categories. Each type has its own rules for tax-deductible contributions, lobbying, eligibility, and other things.

It’s critical to choose the right type of 501(c) for your organization because it impacts far more than just your tax exemption status.

We created an overview of the three most popular types of 501(c) categories to help make your decision process a little easier. To be totally clear, we're not legal experts, so we always recommend consulting with your legal counsel before making any decisions. To be more direct: take the advice of legal experts before taking any action or making any decision!

[fundraising-newsletter-cta][/fundraising-newsletter-cta]

The 3 Most Common 501(c) Options for Nonprofits

As we said, each category has its own benefits and disadvantages, so it’s critical to choose the right 501(c) category for your new nonprofit.

501(c)(3) Charitable Nonprofit Organization

This is the most common type of nonprofit organization in America. They are called charitable nonprofits or public nonprofits. To receive tax exemption as a 501(c)(3) organization, the nonprofit must fit in one of the following categories:

• Religious
• Educational or Literary
• Scientific
• Charitable
• Testing for public safety
• Promoting amateur sports
• Preventing cruelty to children or animals

The IRS requires charitable organizations to explain how they serve the public good. Examples of 501(c)(3) organizations include schools, parent-teacher associations, nursing homes, churches and houses of worship, boys and girls clubs, charitable hospitals, and nonprofits like the Red Cross or the Salvation Army.

There are two categories of 501(c)(3) nonprofits: public charities and private foundations. Public charities get most of their money from donations, grants, and government funding. Public charities usually require a broad base of public support. Private foundations receive their money from investments and endowments.

While tax exemption is the most popular benefit of having 501(c)(3) status, there are other perks for these nonprofits. They can provide tax deductions to individual donors, receive grants from a variety of sources, enjoy limited protection from lawsuits, and even get special postage rates!

There are some disadvantages to choosing the 501(c)(3) classification. Lobbying, campaigning, and publishing propaganda must be kept to a minimum. While there’s no specific measurement, most experts say this type of activity must occupy less than 10 to 20% of the nonprofit’s activities.

The IRS carefully examines all unrelated income. If the organization brings in too much profit, they may have to pay the penalty and taxes. Income-producing activities are limited unless they are related to the organization’s charitable purpose.

The profits from the nonprofit cannot benefit the director or other people working in the organization (beyond fair compensation for their work, of course).

501(c)(4): Social welfare organizations

Social welfare organizations fill a critical role in our communities. 501(c)(4) organizations are nonprofit organizations like local volunteer fire departments, local employee unions, and similar groups. Nationwide, there are over 120,000 501(c)(4) organizations.

Many organizations that are known for political advocacy, campaigning, and lobbying are 501(c)(4) social welfare groups. Groups like The National Organization for Women, the American Civil Liberties Union, the National Rifle Association, MoveOn.org, and the Sierra Club are four of the most successful social welfare organizations in America. Their leadership and members lobby for (and against) legislation and educate the public about issues pertaining to their mission.

In order to qualify as a social welfare organization, your organization "must operate primarily to further (in some way) the common good and general welfare of the people of the community." Many organizations that are explicitly political or have very narrow program focuses are granted 501(c)(4) status. Some social welfare or advocacy groups are very apolitical and receive 501(c)(4) status because they don’t fit neatly into another category (like the Lumberjack World Championship Foundation, for example).

Social welfare organizations often rely on membership dues and individual contributions for the majority of their funding. However, 501(c)(4) organizations cannot offer donors the ability to make tax-deductible gifts. They usually don’t receive grants, so they can engage in lobbying and other political advocacy.

501(c)(6) Membership Based Nonprofits

The 501(c)(6) classification includes membership-based organizations and clubs that promote the business interests of their members. Think of real estate boards, professional associations, trade associations, and sports leagues.

All these kinds of associations are designed to serve people with shared business interests and have a business purpose. According to the IRS, a 501(c)(6) organization must serve the "common interests" of its members and cannot engage in business for profit. Also, if the organization is a business league, it must represent the entire industry or a segment within the industry.

The 501(c)(6) category is somewhat controversial because the organizations that qualify for this tax-exempt status represent for-profit businesses. The NFL, for example, is a 501(c)(6) organization. However, people who donate to these organizations do not enjoy tax-deductions.

How to apply for 501(c) status

Before you start filling out paperwork, you need to have an organized trust, corporation, or association. You’ll need to fill out all the necessary state forms.

Next, you’re ready to complete the federal forms. IRS Form 1023 is the most common form organizations use to apply for 501(c)(3) status. To apply for 501(c)(6) status, you must fill out IRS Form 1024 and pay the current filing fee.

No matter what type of 501(c) status you’re seeking, you must provide information about your organization’s activities, sources of funding, financial information, affiliations with other organizations, and services your members will perform.

Finally, you’ll need to apply for an EIN number (Employee Identification Number).

As we said earlier, it’s essential to seek legal advice from a professional as you form a new nonprofit organization. Choosing the right 501(c) category and filing all the correct paperwork will save you loads of time, energy, and money!

Are you ready to take the next steps in starting your nonprofit? Or, are you in the process of upping your paperwork game? Here are three more resources to keep you going.

• What You Need To Know To Start A Nonprofit: Starting a nonprofit can be overwhelming, but it’s essential to start the right way to avoid future complications. Here’s a handy step-by-step overview of how to start a nonprofit from scratch.
• Everything Your Nonprofit Should Know About Donation Receipts: The IRS requires donor receipts and many nonprofits consider them a necessary evil. However, if done correctly, sending donor receipts will keep the IRS happy and build your relationship with your donors!
• 5 Marketing Strategies Every Nonprofit Should Implement: No matter what kind of nonprofit organization you are starting, there are several fundamental marketing principles that every organization should implement. Quality marketing will help you raise much-needed funds, expand your support base, and get the word out about your mission.