Section 501(c), under the United States Internal Revenue Code exempts non-profit organizations from federal taxes. Under this code, 27 types of non-profit organizations receive federal tax exemption. The majority of these fall under section 501(c)(3).
When you hear the word “non-profit”, a 501(c)(3) is the most likely the first thing that comes to mind. These are charitable organizations supported by donations. Generally, to receive the benefits of a 501(c)(3), a non-profit has to be either charitable, educational, religious, literary, scientific, advocate against animal cruelty or child abuse, organize amateur sports competitions or test public safety.
Some of the most recognized examples of 501(c)(3) non-profit organizations include churches, schools, alumni associations, nursing homes, charitable hospitals, parent-teacher associations and chapters of the Salvation Army or Red Cross.
Due to their tax-exempt status, activities of 501(c)(3) organizations are highly regulated and have many restrictions. No donations bestowed upon or earnings made by the organization should unfairly benefit, directly or indirectly, any member or officer of the organization. Nor can they receive any of the organization’s assets in the event it is no longer operational.
501 (c)(3) organizations are also strictly prohibited from aligning with any political party and are not allowed to publicly support or contribute to candidates or campaigns.
Types of 501(c)(3) non-profit organizations
501(c)(3) non-profit organizations are divided into two main categories:
Public charities: These are the organizations that receive a significant portion, if not all, of their income from the government or public donations.
Private foundation: Unlike public charities, these are organizations that receive their income from endowments and investments, as opposed to donations from the general public or government. They are sub-categorized into two types:
Non-operating foundations: These are private foundations that provide grants to other non-profit organizations from their own income. The benefiting organizations then carry out the non-operating foundation’s agenda.
Operating foundations: On the other hand, an operating foundation is one that organizes and executes its own activities and programs to meet their charitable goals. They do not rely on other non-profits for the execution of their plans.
Benefits of 501(c)(3)
501(c)(3) organizations enjoy several benefits. These are:
- Tax exemption including federal, state and even local taxes.
- Receiving grants and donations from the government and other private foundations.
- Individual donors can be provided with a tax deduction.
- They may be subject to special discounts like reduced postage rates or special advertising rates as non-profits.
- They are more or less protected from lawsuits since only their corporate assets can be subjected to lawsuits.
- This is applicable only if they incorporate before they apply for tax exemption.
How to set up as a 501(c)(3) non-profit
To be set up as a 501(c)(3), you have to first be incorporated as a non-profit in your state. If not, you can be listed as an “unincorporated non-profit organization.” After this, you have to apply to be recognized by the IRS.
An experienced attorney specializing in Business Law and Corporate Transactions can assist a non-profit in navigating all the necessary requirements and legal paperwork to apply for 501 (c)(3) status. If you have questions about setting up a 501 (c)(3), call the team at Dunlap Bennett & Ludwig today.
Posted in: Business Law