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There are several types of nonprofits to consider when starting one from the ground up. A nonprofit is an umbrella term for different tax-exempt organizations classified by the Internal Revenue Service (IRS) based on their purpose and activities.
Two stand-out categories that constitute the majority of nonprofits are Section 501(c)(3) and 501(c)(4) of the Internal Revenue Code. Both nonprofit types have unique restrictions, pros, and cons suitable for different nonprofit causes.
We have compared 501(c)(3) vs 501(c)(4) in detail to help you apply for the most appropriate status.
What is a 501(c)(3) Nonprofit?
A 501(c)(3) status by the IRS offers tax-exemption benefits to nonprofit organizations. 501(c)(3) organizations are eligible to receive tax-deductible donations from individual and corporate donors.
Although exempt from federal taxes, 501(c)(3) organizations must pay employee income taxes and social security payments.
To qualify under section 501(c)(3), an organization must be involved in IRS-approved activities, which include:
- Relief for the poor, distressed, and underprivileged, such as providing food, shelter, or financial assistance to those in need.
- Advancement of education, science, and religion, such as operating schools, conducting research, or providing religious instruction and services.
- Advocacy against animal cruelty, such as promoting animal welfare and preventing abuse or mistreatment of animals.
- Preventing juvenile neglect and abuse, such as providing counseling, shelter, or support services for at-risk youth.
- Protecting civil and human rights, such as advocating for equal rights, non-discrimination, and social justice initiatives.
- Reducing neighborhood tensions and promoting community development through housing initiatives, youth programs, and conflict resolution efforts.
What is a 501(c)(4) Nonprofit?
A 501(c)(4) entity is also a tax-exempt nonprofit organization, but it is different from 501(c)(3) in terms of eligibility requirements and limitations. Although 501(c)(4) nonprofits are tax-exempt, donations to these organizations are not tax-deductible.
501(c)(4) nonprofits are largely involved in promoting social welfare for the general public, including political advocacy and lobbying.
To qualify for 501(c)(4) status, an organization must fulfill the following requirements:
- It must operate exclusively to advance social welfare initiatives.
- It must operate on a nonprofit model, with all the earnings dedicated to its social welfare purpose.
- It must engage in non-commercial activities that are not charitable.
Social welfare organizations, trade unions, and civic leagues fall under the 501(c)(4) category. Here are some well-known examples of 501(c)(4) nonprofits:
501(c)(3) vs. 501(c)(4) : A Snapshot of the Differences
While we’ll dive deep below, here’s a snapshot of the other key distinctions you must understand before choosing the right foundation for your nonprofit.
What is the difference between a 501c3 and 501c4?
Purpose
A 501(c)(3) organization must operate exclusively for one or more exempt purposes dictated by the IRS. They offer direct services to their target community, such as:
- Food donations
- Free health services
- After-school programs
A 501(c)(4) nonprofit can participate in activities beyond its limitations if they are meant for the public's good.
Registration
To register as a 501(c)(3) nonprofit organization, you must submit Form 1023 with the IRS. When applying for 501(c)(4) tax-exempt status, you must file Form 1024-A.
In both cases, you must first register and incorporate your nonprofit at the state level. The process of starting a nonprofit may vary with each state.
Here are some quick guides to help you:
Eligibility for Tax-Exemption
While both 501(c)(3) and 501(c)(4) nonprofits are exempted from paying federal income taxes, their tax obligations differ.
As a 501(c)(3) organization, you are not obligated to pay most state and local taxes. For a 501(c)(4) nonprofit, some taxes are applicable depending on the state the organization is based in.
Fundraising and Tax Deductibility
Tax deductible contributions are a significant fundraising benefit nonprofits can offer to their donors to boost retention. Only donations to 501(c)(3) organizations qualify for tax relief.
Limitations exist for contributions like donations offered to volunteer fire companies and war veterans organizations.
Other 501(c)(4) nonprofits must be transparent about their non-tax-deductible donation status in all fundraising efforts. The information should also mention that some donations may be deductible as business expenses if and when applicable.
Lobbying and Advocacy
501(c)(3) organizations:
- Cannot participate or intervene in political campaigns for or against candidates for public office.
- Can engage in some lobbying activities, but it cannot be a substantial part of their activities.
- Cannot support/oppose legislation beyond insubstantial levels without being subject to taxation.
501(c)(4) organizations:
- Cannot have political campaign activity as their primary purpose.
- Are strictly prohibited from directly or indirectly participating in political campaigns.
- Can engage in lobbying related to their purpose.
- Can support legislation related to their cause.
- Appeal to representatives and other governing bodies.
- Voice their opinions of elected officials.
Note that a 501(c)(3) organization must file Form 5768 before taking part in any lobbying efforts.
Political Campaign Intervention
Some of the activities 501(c)(4) nonprofits are permitted to engage in include:
- Pay for costs essential to a political organization.
- Compare their missions with the candidate’s mission.
- Ask candidates to sign pledges on an issue.
- Endorse candidates whose views align with theirs.
- Support their preferred candidate’s mission and conduct political lobbying.
- Conduct voter registration activities.
Unlike 501(c)(4), 501(c)(3) nonprofits cannot support or oppose political candidates. Their lobbying activities must be within admissible limitations.
The exact percentage may vary with the 501(c)(3) nonprofit’s size.
A 501(c)(3) nonprofit can sponsor debates between all candidates to highlight their views and opinions, but it cannot endorse a particular candidate.
Disclosure Requirements
501(c)(3) nonprofit organizations are public charities and must disclose certain crucial information, which includes the nonprofit’s:
- Annual Form 990 details
- Financial statements
- List of donors
Unlike private foundations, the information is provided to the public on the IRS official website and other credible online databases. 501(c)(4) nonprofit organizations are not bound to disclose donors, and supporters are protected from public scrutiny, which may motivate more charitable contributions to their organization.
Grounds for Revocation
The IRS can revoke a 501(c)(3) organization’s tax-exempt status on the following grounds:
- Excessive lobbying, which goes beyond a nonprofit’s purpose or influencing legislation to help a partisan side
- Participation in any political activity, apart from civic and voter education
- Exploitation of the organization's funds.
- Failure to submit annual reports to the IRS.
501(c)(4) social welfare organizations can lose their tax-exempt status only when:
- They do not submit annual returns. Three consecutive violations will result in direct revocation.
- They engage in activities that contradict their stated tax-exempt purpose.
- They engage in unrelated business activities beyond their scope of objectives and fail to report this to the IRS.
Bottom Line on 501c3 vs 501c4
Understand the key differences between 501(c)(3) and 501(c)(4) nonprofit status before setting up your organization. With different eligibility requirements, tax benefits, and limitations, choosing the right one is essential to achieving your organization's mission.
Regardless of whether you choose to establish a 501(c)(3) or 501(c)(4) nonprofit, having a reliable fundraising strategy and the right tools is crucial for your organization's success. Zeffy offers a 100% free fundraising platform to help you maximize your fundraising efforts and achieve your mission more effectively.
FAQs - 501c3 vs 501c4
