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Many people often wonder what the difference is between a 501(c)(3) and a 501(c)(4) organization. It is easy to confuse the two classifications as both are considered nonprofits and there are many similar characteristics. However, there are crucial differences between these two types of nonprofit organizations and it is important to understand the distinction.
The difference between 501(c)(3) and 501(c)(4) organizations
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According to the Internal Revenue Code, 501(c)(3) and 501(c)(4) organizations are nonprofit organizations that are exempt from paying federal income tax. 501(c)(3) organizations are either a public charity, private foundation or private operating foundation with open membership whereas 501(c)(4) organizations are civic leagues or associations operated exclusively for the promotion of social welfare or local associations of employees with limited membership.
When it comes to lobbying and political activity, 501(c)(3) organizations can appeal directly to legislative bodies and representatives and may support issue-based legislation. However, they must notify the IRS of their intent to lobby by filing form 5768, which formally informs the federal government that one has elected to use the expenditure test to have the organization’s lobbying activity measured. Under this test, lobbying capacity is typically limited to spending less than 5 to 20% of the organizational budget on lobbying activities, depending on the size of your organization.
501(c)(4) organizations can engage in unlimited lobbying so long as it pertains to the organization’s mission. 501(c)(3) organizations are not permitted to engage in political activity, endorse or oppose political candidates, or donate money or time to political campaigns, but 501(c)(4) organizations can do all of the above.
In regards to supporting these organizations, donations made to 501(c)(3) organizations are deductible to the full extent of the law as charitable contributions. Donations made to 501(c)(4) organizations are not deductible, though some businesses who make these contributions often write them off as advertising or business expenses. (Please consult your accountant.)
Which should you choose, a 501(c)(3) or a 501(c)(4)?
If you are planning on doing limited or no lobbying, then you should choose the 501(c)(3) status so donors can benefit from giving to your organization. However, if your organization will be doing a lot of lobbying or any campaigning, you should form a 501(c)(4) to inoculate yourself from any charges of violating your 501(c)(3) status.
If you want the best of both worlds, you can have two separate but affiliated organizations – one a charitable 501(c)(3) and the other a 501(c)(4) lobbying arm. Many trade organizations lobby extensively on behalf of their members, but have an affiliated 501(c)(3) foundation for charitable giving and educational purposes.
Some examples of 501(c)(3) organizations include charities and educational institutions such as The Global Fund for Children and The Stella Adler Studio of Acting. Examples of 501(c)(4) organizations include unions, fraternal organizations and trade associations.
May a nonprofit 501 (c)(4) community organization refuse to admit a member?
May a nonprofit 501(c)(4) community organization refuse to admit a member because “you don’t fit in”? The bylaws say that membership “is open to all singers, musicians, entertainers….”
Ordinarily, a nonprofit membership corporation may select its own members and may refuse to admit someone whom the selection committee feels would not fit in. Our model bylaws for membership nonprofits includes a specific statement that membership may be denied for any reason deemed sufficient to the Directors.
If the organization is so large and open that it is categorized as a “public accommodation” under anti-discrimination laws, it may not be able to discriminate against members of a protected class, and “you don’t fit in” may be considered code for such discrimination. But if it is a decision legitimately based on personality alone, it may not be discriminatory and not illegal.
Regulation of corporate governance demands as much care and thought as the Constitution of a country
Bylaws of a nonprofit Corporation should not simply be taken “off the shelf” and adopted by the organization. The Articles of Incorporation and the Bylaws essentially form the “Constitution” of the organization and establish the rules for governance. Like all Constitutions, they should be considered carefully.
In most states, the state nonprofit corporation law provides minimum standards and default procedures if the Articles and Bylaws are silent on many issues. But the Bylaws can be used to spell out specific provisions and are particularly important in establishing the rules about who controls the organization.