FORMING A NONPROFIT ORGANIZATION?
FORMING A NONPROFIT ORGANIZATION?
HERE’S WHAT YOU NEED TO KNOW ABOUT 501(C)(3) VS 501(C)(6).
There are many similarities as well as significant differences when it comes to 501(c) organizational structures. When creating a new nonprofit organization in Orlando or in the State of Florida, it is prudent to consult with legal and tax professionals with the background and experience to help you make an informed decision and to protect your ongoing tax-exempt status.
It is helpful to first understand the distinction between a “nonprofit” and a “tax-exempt” entity. “Nonprofit” refers to an entity’s incorporation status as governed by state law, whereas “tax-exempt” refers to federal income tax exemption governed by the Internal Revenue Code. The (C)(3) and (C)(6) are two common IRS tax-exempt statuses for nonprofits. While the (C)(3) and (C)(6) are alike in terms of income tax exemption, other factors such as qualifying characteristics, application process (IRS Form 1023 vs. 1024), and various rules governing their ongoing activities can be quite different.
It is important to note that a 501(c)(3) organization is operated exclusively for charitable, educational, religious, literary or scientific purposes, and is expressly prohibited from engaging in more than an insubstantial amount of activities not in furtherance of its exempt purpose. A 501(c)(6) organization is operated to promote a common business interest and to improve business conditions in the industry, and may engage in more than an insubstantial amount of activities not in furtherance of its exempt purpose so long as it is primarily engaged in activities that further its exempt purpose.
FUNDRAISING / CONTRIBUTIONS & DUES DEDUCTIONS
501(c)(3) organizations have enhanced fundraising advantages, such as eligibility to receive tax-deductible “charitable contributions” and gifts of property and eligibility to receive many grants. There are certain stipulations in the Code which should be considered, specifically for entities created outside the United States or entities purposed with testing for public safety. It should also be noted that contributions earmarked for lobbying will not be deductible.
Payments of dues to 501(c)(6) organizations may be deductible to a member as an ordinary and necessary business expense in the conduct of the member’s business. However, contributions to 501(c)(6) organizations are not deductible as charitable contributions. Moreover, a 501(c)(6) organization must disclose, in any fundraising solicitation, that contributions to the organization are not deductible for federal income tax purposes as charitable contributions.
LOBBYING
501(c)(3) public charities may engage in lobbying so long as such activities are insubstantial in relation to their overall activities. A (c)(3) will lose tax-exempt status if the IRS determines that it has engaged in “substantial” lobbying activities. Despite such restriction, public charities may engage in generous levels of lobbying without it being considered substantial if they make the 501(h) election. 501(c)(3) private foundations are generally not permitted to engage in lobbying but may fund grantees with general support that the grantees decide to use for lobbying. 501(c)(3) organizations often discount their ability to engage in substantial permissible advocacy-related activities, including issue advocacy, get-out-the-vote drives, and voter registration.
501(c)(6) organizations are allowed a wide range of lobbying in furtherance of their exempt purposes. The main stipulation is that they are required to disclose to membership the percentage of their annual dues that is lobbying.
POLITICAL CAMPAIGNS
501(c)(3) organizations are prohibited from engaging in any political campaign intervention activities. On the other hand, a 501(c)(6) organization my engage in political campaign intervention activities so long as such activities do not represent their primary activity.
There are many factors to be considered when thinking about forming a nonprofit, tax-exempt organization. The criteria above should not be considered all-inclusive, but an overview of the pros and cons of only two of several types of 501(c) structures. Watson Sloane’s experienced corporate and tax attorneys can provide you with a detailed analysis and guidance in selecting the right structure for your new entity.