It’s common for people to use the term nonprofit loosely without really understanding what it means, which leads to confusion about a 501(c)(3) vs. 501(c)(4), vs. 501(c)(6). The terms nonprofit and not-for-profit are umbrella terms for federal classifications of tax-exempt organizations. While 501(c)(3) is the most common nonprofit designation, the IRS lists 29 different tax-exempt organizations, each with its own set of rules. The classifications for 501(c)(4) and 501(c)(6) is somewhat better known than most other nonprofit classifications.
To help sort out the confusion about nonprofit classifications, we’ll define the terms nonprofit and not-for-profit and more narrowly define the ones most people are the most familiar with. We’ll wrap things up with a description of a few political nonprofit designations.
Nonprofit and Not-for-Profit: Aren’t They the Same?
In general, the term nonprofit refers to an organization that doesn’t operate to make a profit as its primary purpose. Nonprofit loosely refers to any organization that furthers a social cause or operates according to a mission that correlates to tax-exempt status.
As reported at WallStreetMojo, there are two main distinct terms under the IRS 501(c) code — nonprofit and non-for-profit. Technically speaking, the two terms have distinctly different meanings.
A nonprofit organization provides goods and services to the public. Nonprofits can accept donations, and as charitable organizations, they don’t have to pay income tax.
By contrast, a not-for-profit organization typically serves a group of its members. Like nonprofits, not-for-profit organizations also host events and activities, but they aren’t allowed to distribute their profits or accept donations, and they don’t qualify for tax-exempt status.
It’s acceptable and legal for nonprofits and not-for-profits to make profits as long as they follow the IRS rules according to their purpose and classification.
501(c)(3) vs. 501(c)(4) vs. 501(c)(6): Sorting Out the Confusion
The codes for 501(c) organizations look similar, and the final digit in each classification correlates to a distinct nonprofit classification.
Let’s take a look at three of the most notable 501(c) rules one at a time.
Nonprofit organizations that qualify for the 501(c)(3) classification are public charities. To get this designation, organizations must be one of the following types of charities:
- Religious institutions
- Educational institutions
- Scientific organizations
- Literary organizations
- Organizations that test for public safety
- Organizations that foster national or international sports competitions
- Organizations that have a mission to prevent cruelty to children or animals
The IRS requires 501(c)(3) organizations to form boards that consist of independent and unrelated individuals.
These types of nonprofits typically get most of their revenue either from the general public or the government. Specifically, 501(c)(3) organizations must get at least a third of their donations from public support. Acceptable donations can come from individuals, companies, or other charitable organizations.
Donors can deduct donations from their taxes up to 60% of their income for individuals and up to 10% for corporations.
Private foundations and private operating foundations also fall under the 501(c)(3) classification. A private foundation or non-operating foundation doesn’t host active programs, and they don’t have to be publicly supported. It’s common for private foundations to support the work of charities through grantmaking.
Donations to private foundations are tax-deductible up to 30% of the donor’s income. Board members of a private foundation may be related and are often made up of family members.
Finally, private operating foundations are sort of a hybrid between nonprofits and private foundations. They often host programs and activities just as charities do, but other attributes are similar to private foundations — for example, they’re allowed to have related individuals on the board.
Trade unions, social welfare organizations, and civic leagues fall under the 501(c)(4) classification. The concept behind this classification is to outline the rules for organizations that exist to promote social welfare.
One of the main rules for 501(c)(4) organizations is that no private individual or shareholder can benefit from the organization’s profits. Suppose this happens, and it involves someone that has significant influence over the organization. In that case, the IRS could impose an excise tax on that person and other leaders that agreed to the transaction. Organizations that intend to operate under 501(c)(4) are required to notify the IRS of their intent.
Organizations that promote social welfare are required to further the common good and welfare of an entire community and not just benefit its members.
Much like other nonprofit organizations, section 501(c)(4) organizations can participate in a small amount of political lobbying as long as it’s not their primary activity.
The IRS designated the 501(c)(6) classification for business leagues, real estate boards, chambers of commerce, professional sports leagues, boards of trade, and similar organizations as long as they’re not organized for profit.
Like other nonprofits, no private individuals or shareholders may benefit from a 501(c)(6) organization. Similar to other classifications, organizations in this group have to limit their lobbying activities. They also have to give their members notice if their dues are being used for lobbying.
Business leagues are associations that have a common business interest they want to promote. To maintain tax-exempt status, business leagues must be committed to improving the circumstances of all parts of a specific industry within a particular geographic area or a certain industry as a whole.
The same rules apply to 501(c)(6) organizations not profiting from activities and political lobbying as other nonprofit classifications.
Designations for Political Organizations
A few other groups are worth noting in the discussion of 501(c) groups, including 527 groups, hybrid PACs (political action groups), and political action committees.
There are 527 tax-exempt groups that organize to raise money for political activities. They are typically comprised of political parties, political candidates, committees, or associations. Whereas 527 groups exist at the federal, state, and local levels, they can raise unlimited funds.
Hybrid PACs, also known as Carey Committees, are political action committees that aren’t affiliated with a particular candidate. Carey Committees can operate as traditional PACs and as super PACs. They must have separate bank accounts for each purpose.
Finally, PACs are political committees that raise money for electing or defeating candidates. They collect money from their members or employees (up to $5,000 per person annually) and make political contributions under the name of the PAC. PACs can give up to $5,000 to a candidate every election and up to $15,000 to national political parties.
Regardless of whether you’re leading a 501(c)(3) vs. 501(c)(4) vs. 501(c)(6), a board management system by BoardEffect will help you manage compliance issues and all your other nonprofit activities.