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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 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 exempt status.
A 501(c)(3) status by the IRS offers tax-exemption benefits to nonprofit organizations. 501(c)(3) organizations are eligible to receive a charitable contribution deduction from individual and corporate donors.
Although exempt from federal taxes, 501(c)(3) organizations must pay employee income taxes and social security payments. They may be operated primarily as private foundations or public charities and no earnings can go to a private shareholder, individual, or board members.
To qualify under section 501(c)(3), an organization must be involved in IRS-approved activities, which include:
Relief for the poor and underprivileged, such as providing food, shelter, or financial help
Advancement of education, science, and religion through schools, research, or religious services
Advocacy against animal cruelty, promoting welfare and preventing abuse
Preventing juvenile neglect and abuse with counseling, shelter, or support services
Protecting civil and human rights by advocating for equality and social justice
Reducing neighborhood tensions and fostering community development through housing and youth programs
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 primarily promote social welfare for the general public, including political activity and lobbying. Those who support individuals running for public office or participate in political action groups may choose this status.
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 not make its primary activity to support or reject specific elected officials.
It must operate on a nonprofit model, with all the earnings dedicated to its social welfare purpose.
It must be primarily engaged 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:
Exempt from most state and local taxes, might pay excise tax on investment income for private foundations
Some taxes are applicable depending on the state
Tax Deductibility
Donations qualify for tax relief
Donor contributions do not qualify for tax relief
Lobbying and Advocacy
Tax restrictions on political campaigns and ability to influence legislation support or opposition, and limitations on lobbying.
Tax restrictions on politics as a primary purpose and participation.
Political Campaign Intervention
Cannot support or oppose political candidates
More flexibility and fewer restrictions to advocate for causes and engage in political activities
Disclosure Requirements
Required by law to maintain transparency to the public.
Not bound to disclose to donors.
Grounds for Revocation
Can lose tax-exempt status on several grounds.
Less restrictions that would cause them to lose tax-exempt status.
Additional Pros
- Eligible for public and private grants
-No liability for directors, nonprofit members, and employees, except for violating laws
- Eligible to participate in political lobbying if it aligns with the cause
- More flexibility in advocacy
What is the difference between a 501c3 and 501c4?
Nonprofit’s 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 entire 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), you must file Form 1024-A.
In both cases, you must register and incorporate your nonprofit at the state level. The process of starting a nonprofit may vary by state.
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.
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, such as 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 in political campaigns
Limited lobbying allowed, must not be substantial
Minimal legislative activity to avoid taxation (influencing legislation of any kind)
501(c)(4) organizations:
Political campaign activity cannot be their primary purpose
Prohibited from direct or indirect political campaign involvement
Can lobby and support legislation related to the organization’s mission
Can appeal to representatives and share opinions on officials
Note that a 501(c)(3) organization must file Form 5768 before participating 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 permissible limitations.
The percentage may vary with the 501(c)(3) nonprofit 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:
Unlike private foundations, the information is provided to the public on the IRS's 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.
The IRS can revoke a 501(c)(3) organization’s status on the following grounds:
Excessive lobbying beyond nonprofit purposes
Participation in political activities outside civic or voter education
Misuse of organizational funds
Failure to file annual IRS reports
501(c)(4) social welfare organizations can lose their status only when:
Failure to file annual returns, with three consecutive violations leading to revocation
Activities that contradict their tax-exempt purpose
Unrelated business activities exceeding their stated objectives
Start Your Nonprofit With Zeffy
Starting a 501(c)(4) or 501(c)(3) organization can feel overwhelming, but having the right guidance makes all the difference. Instead of spending up to $2,000 on legal fees, Zeffy’s team of experts can help simplify the process by assisting you with the documentation needed to file for your status.
With Zeffy, the only expenses you’ll need to handle are state and IRS filing fees, ensuring more of your resources go directly toward advancing your mission.
If your goal is to promote general welfare and support specific candidates with similar views, register as a 501(c)(4). Go with 501(c)(3) if political activities are not part of your initiatives. Both nonprofit classifications foster national good in their own ways, and can create well-rounded an publicly supported organizations.
As the Internal Revenue Code section 501(c)(4) dictates, organizations must not work for profit to operate as tax-exempt social welfare organizations. Their primary purpose should be to promote social welfare.
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