The terms nonprofit organization and 501(c)(3) are often used interchangeably. That’s not entirely correct. An association is a subset of the nonprofit world. Since nonprofit organizations and associations have different purposes in why they exist and who they serve, the federal government differentiated them by narrowing their definitions and qualifications.
Both nonprofit organizations and associations are tax-exempt. Both types of entity can make a profit; however, they must retain or reinvest their profits in their organizations. The primary reason that nonprofits are different than associations is that nonprofits are focused on their mission, whereas associations exist for the sole purpose of providing products and services for the needs of their members.
In the way of providing an analogy, think of a nonprofit as a bucket of cleaning water and an association as a pitcher of drinking water. They’re both containers of water, but they’re designed with different purposes in mind.
When a Tax-Exempt Organization Isn’t a Charity
The IRS grants tax-exempt status to certain religious, educational, charitable and other organizations that are focused on fulfilling their missions. Because associations are a subset of the nonprofit realm, we don’t hear about them as much. In addition to Section 501(c)(3) of the IRS code, there is also a Section 501(c)(4) and Section 501(c)(6).
Nonprofit Organizations Are Different Than Social Welfare Organizations
Some people may be inclined to believe that social welfare associations are exactly the same as nonprofit organizations. When we look at their purposes, we find that’s not exactly accurate. Social welfare organizations fall under 501(c)(4). To qualify to be under this section, the association must not be organized for profit and it must operate exclusively to promote social welfare. There are two distinct types of social welfare associations, and each has its own distinct qualifications.
- Civic Leagues. Associations that aren’t organized for profit and that operate exclusively for the promotion of social welfare and to improve communities.
- Local Associations of Employees. Associations are composed of employees of a designated person in a particular municipality where the net earnings are devoted exclusively to charitable, educational or recreational purposes.
Homeowner associations, condo associations and volunteer fire companies may qualify for tax-exempt status as social welfare organizations as long as they meet the requirements for the exemption.
Organizations that exist for the primary purpose of lobbying activities may also be classified as a social welfare organization.
Examples of 501(c)(4) Social Welfare Associations
Social welfare associations have a couple of distinctions. Their donors aren’t allowed to claim their donations. That’s because only the members benefit from the association. Also, social welfare associations may participate in lobbying for political causes. This is vastly different from 501(c)(3) organizations, which can lobby, but which can’t make lobbying a primary activity of the organization.
Here is a shortlist of associations that qualify under 501(c)(4) statutes:
- Concerned Veterans for America
- Patients for Affordable Drugs NOW
- 314 Action
- Onward Together
- Planned Parenthood Action Fund
- America First Policies
- Project Veritas Action
- Alliance for Retired Americans
- People for the American Way
Social Welfare Associations Under Section 501(c)(6)
The IRS code for nonprofit organizations also allows for tax-exempt status for business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, as long as they aren’t organized for profit and no part of their earnings benefits any individuals or shareholders. These associations qualify for tax-exemption under Section 501(c)(6).
Like social welfare associations that qualify under IRS Section 501(c)(4), these associations may engage in some political lobbying and other activities when it pertains to their exempt purposes. Associations that choose to participate in political lobbying may be required to give their members notice that their dues may be used for that purpose. Associations that fail to provide this notice may be taxed on the amount they spend on lobbying.
Business leagues also fall under Section 501(c)(6). A business league is an association where the members have some common business interest and share a purpose of promoting their common interest. Members of business leagues don’t profit from their joint activities — their interest is solely to promote a particular type of business or industry.
Trade and Professional Associations
An example of a trade association is the United Brotherhood of Carpenters. An example of a professional association is the Independent Insurance Agents of Illinois (IIAI). Both are business leagues. Business leagues must commit to improving business conditions of one or more lines of business, rather than supply products or perform services for the benefit of individuals.
In the examples given, the United Brotherhood of Carpenters works to improve safety standards and promote the trade as it pertains to all facets of carpentry, including residential and commercial buildings. Insurance associations promote the quality of education for insurance agents and work with legislators to enact fair laws within the insurance industry.
It’s also important to note that “line of business” does not refer to a group of businesses that exist to promote a certain brand within the industry.
Chambers of Commerce
Chambers of commerce exist at the state and local levels. Chambers of commerce are considered associations and also fall under the Section 501(c)(6) IRS code, much like business leagues. The main difference is that chambers of commerce collectively promote the common economic interests of all businesses within a certain state or community.
All types of nonprofit and social welfare association should have a board of directors and operate under best practices for nonprofit organizations. Nonprofit organizations are trending toward using board portals to help them remain in compliance with tax-exempt statutes and manage their organizations with fidelity and integrity.
Federal Benefits Uniquely Designed to Fit the Purpose of Social Welfare Associations
Social welfare associations may secure funds to support their associations through grants, fundraising, government funding and public donations, much like nonprofit organizations. Typically, social welfare associations get the bulk of their funding through membership dues or fees.
Members of associations may make extra donations to the association if they choose. Because the members draw benefits directly from the association, the IRS doesn’t allow association members to claim their donations at tax time.
The federal government set up the 501(c) codes as a means of helping nonprofit associations and social welfare organizations to enjoy tax-exempt status so they would have more money to help our society, in a way that benefits state and federal governments and the people they serve.