501c3 vs 501c4: Everything You Need to Know
To accurately compare a 501c3 vs 501c4 organization, you must know what they are and both of their advantages and disadvantages.3 min read
2. What is a 501c4?
3. Why has 501c4 Increased in Popularity?
4. What is a 501c3?
5. Restrictions of a 501c3
6. 501c3 Required Annual Filings
7. Restrictions of a 501c4
8. Differences in Lobbying Requirement for 501c3 vs 501c4
501c3 vs 501c4
To accurately compare a 501c3 vs 501c4 organization, you must know what they are and both of their advantages and disadvantages.
What is a 501c4?
Nonprofit organizations typically classified under 501c4 include:
Volunteering fire departments
And other groups that promote social well-being
Why has 501c4 Increased in Popularity?
The Supreme Court reached a decision in 2010 called the "Citizens United". This decision allowed for labor union and corporations raise money and spend without limitation, while still being able to register under section 501c4 and be tax-exempt.
What is a 501c3?
501c3 is typically the most popular classification for nonprofit organizations. To qualify to be classified as a 501c3, the organization must fit into one of these exempt purposes, as laid out by the IRS:
Public safety testing
Fosters of amateur sport bouts
Prevention of Children or Animal cruelty
The IRS further defines that a 501c3 organization are either a privation foundation that anyone can join, a private foundation altogether, or public charities.
Restrictions of a 501c3
The leading thing to note here is that no gains by the organization can be used to directly benefit any individual of the organization. However, individuals working in the organization can be paid for their work.
One of the main differences between a 501c3 organization and a publicly traded company is that with a publicly traded company the shareholders and directors split the earnings, a 501c3 organization cannot take part in this.
In the event that the 501c3 organization shuts down, it still remains that no assets may be distributed to any individuals of the organization.
All activities associated with lobbying should be less that 10-20 percent of the 501c3's activities.
501c3 Required Annual Filings
A Form 990 must be filed every year by the 501c3 to layout its financial activity for that year. However, schools and churches may have extra filing requirements.
Restrictions of a 501c4
Similar to a 501c3, no profits of the 501c4 can be used to directly benefits any of its individuals. The 501c4 organization cannot stand in support of or against any politician, whether done indirectly or directly.
However, the 501c4 is allowed to partake in minimal political activity, but those activities cannot become the focus of the organization. Also, when engaging in political activities, the 501c4 risks that any expenses incurred may be taxed.
Lobbying is allowed only for the sake of achieving its social well-being goal. If the 501c4 engages in lobbying, it may have to disclose how much of its members' dues are going toward lobbying.
If an organization engages in lobbying, disclosure must be made of how much of members' fees are going toward lobbying activities or pay a penalty tax.
Differences in Lobbying Requirement for 501c3 vs 501c4
A key difference in 501c3 vs 501c4 organizations is their lobbying requirements. These lobbying and political efforts include:
Attempting to help a legislation pass
Attempting to block a legislation
And reaching out garner support from the public
A 501c3 must keep its lobbying efforts to an insubstantial level (usually less than 10-20 percent of the organizations activities and budget). The exact "insubstantial" percentage is determined by the organization's size.
Lobbying for the 501c3 allows the following:
501c3 can support legislations based on their cause or issue
May appeal to representative and other governing bodies
Must file Form 5768 before participating in any of the above
Usually has to spend less than 5-20 percent of the budget on acts of lobbying
A 501c4 is not limited on how much lobbying it can engage in, so much as the lobbying pertains to the organization's cause.
Differences in donations made to a 501c3 vs 501c4:
501c3- Charity contributions are deductible to the full extent of the law.
501c4- Although businesses who send donations to 501c4's often write those contributions off as business or advertising expenses, these donations are not deductible.
If your organization plans to do little to no lobbying decide on a 501c3, which allows those who donate to your organization to benefit.
If your organization plans on do a lot of campaigning or lobby go with a 501c4.
Both 501c3 and 501c4 organizations are exempt from federal income taxes on money earned or raised pertaining to their causes.
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