Both 501(c)(3) and 501(c)(4) signify nonprofit organizations and, with their similarities in the overall nonprofit sector, it’s definitely easy to mix up these two classifications. Nevertheless, 501(c)(3) organizations and 501(c)(4) organizations have some stark differences, and understanding these two tax-exempt classifications can have a major impact on your business.
According to the Internal Revenue Service code, both 501(c)(3) and 501(c)(4) organizations are tax-exempt nonprofit organizations, meaning that the funds and foundations are exempt from paying federal income taxes as well as other income taxes.
If you are an Illinois resident and you are starting a nonprofit organization, one of the first steps is to call Illinois nonprofit attorney James C. Provenza for legal counsel and guidance for your nonprofit. From 501(c) compliance to filing for federal and state tax exemptions, Illinois’s James C. Provenza & Associates is the law firm to help you during every stage of nonprofit ownership.
Overview of 501(c)(3) and 501(c)(4) Nonprofits
The main difference between 501(c)(3) and 501(c)(4) nonprofits is the type of organization and the focus of its mission. For the majority of cases, nonprofits organized and operated for charitable purposes would fall under a 501(c)(3) classification; nonprofits organized and operated for social welfare purposes would fall under a 501(c)(4) classification. However, “charitable” and “social welfare” are quite similar terms, and when we ask nonprofits about choosing a designation, many often respond, “Why would I choose one over the other?”
Depending on the specific activities you want to pursue, you may have little choice in your classification. For instance, 501(c)(3) organizations often include:
- Religious
- Charitable
- Scientific
- Testing for Public Safety
- Literary
- Education Purposes
The exempt purpose for most 501(c)(4) organizations is the promotion of social welfare, such as civic betterments and social improvement. Examples of 501(c)(4) nonprofits include Lions Club and homeowners associations.
Tax Exemptions for 501(c)(3) and 501(c)(4) Nonprofits
Whether you’re thinking of starting a 501(c)(3) or a 501(c)(4) nonprofit, you’ll be able to take advantage of federal tax exemptions on the income raised or earned, as long as that income is related to the organization’s tax-exempt purpose.
As a 501(c)(3) organization, you can apply for the federal tax exemption by filing Form 1023 or Form 1023-EZ with the IRS.
As a 501(c)(4) organization, the nonprofit may either do one of the following actions for achieving its tax-exempt status:
- Apply for formal IRS recognition of exemption by filing Form 1024
- Self-declare as exempt 501(c)(4)
As a 501(c)(4) organization, you can take advantage of either option; however, no matter the option you choose, you need to notify the IRS within 60 days after your nonprofit establishment, and you need to state your nonprofit’s intent to operate as a 501(c)(4) organization by e-filing Form 8976.
Donations for 501(c)(3) v. 501(c)(4)
Although the definitions of these organizations are fairly similar, major differences start to appear when you get into the details, especially when it comes to soliciting and documenting donations and engaging in political lobbying.
For instance, 501(c)(3) organizations are able to receive deductible charitable contributions, while contributions to 501(c)(4) organizations are generally not deductible with limited exceptions for certain contributions to volunteer fire companies and war veterans organizations.
Political Activities for 501(c)(3) v. 501(c)(4)
Political activities and lobbying is a major differentiating factor between 501(c)(3) and 501(c)(4) nonprofits.
With regards to political lobbying, 501(c)(3) public charities may engage in lobbying so long as such activities are insubstantial in relation to their overall activities. Private 501(c)(3) organizations, on the other hand, are generally not permitted to engage in lobbying, but they may fund grantees with support that the grantees decide to use for lobbying.
A 501(c)(4) organization, on the other hand, can enjoy unlimited lobbying in furtherance of its social welfare purposes.
Get Nonprofit Help By Calling the Illinois Nonprofit Attorney James C. Provenza Today
The 501(c)(3) v. 501(c)(4) distinction is very important, as if you have a 501(c)(3) nonprofit and you engage in substantial political lobbying, then you may be in violation of your 501(c)(3) classification. In other words, if you plan on engaging in political activity, lobbying, or political campaign intervention, you should definitely consider a 501(c)(4) designation.
Either way, when starting your nonprofit organization and getting that crucial tax-exempt status, whether at the federal level or the Illinois state level, one of your most crucial assets is a dedicated and experienced Illinois nonprofit attorney. With years of experience helping countless nonprofits throughout Illinois, we at James C. Provenza & Associates can provide comprehensive legal guidance to keep your nonprofit compliant with federal and state laws.
Call our Chicago nonprofit law firm, today at (847) 729-3939.
