Types of Nonprofit Organizations

Just as there are countless variations of for-profit organizations, there are a few—three, to be exact—main categories of nonprofit corporations. Under these three categories fall the more-familiar subcategories:

  • The public benefit corporation includes the generally understood charitable organizations and social welfare organizations such as those with a 501(c)(3) or a 501(c)(4) classification.

  • The mutual benefit corporation, which is not public, might include groups such as homeowners' associations and private foundations.

  • The great “other,” which includes fraternal societies, labor organizations, farm bureaus, social clubs, veteran's organizations, cemetery companies, credit unions, and the many other organizations listed under the 501(c) code of the Internal Revenue Service.

The Difference Between a 501(c)(3) and a 501(c)(4) Organization

If you are directly involved in the incorporation process or work on an organization's application for federal nonprofit status, it's important to understand how the two primary types of nonprofits—501(c)(3)s and 501(c)(4)s—are similar and how they are different.

The Similarities

A few basic elements apply to both types of organizations. Both are exempt from paying federal income tax, must be operated as nonprofits, and are restricted from allowing any individual or shareholder to benefit financially from the work of the organization. In fact, because those particular rules are so similar, any organization that qualifies for 501(c)(3) status also qualifies for 501(c)(4) status.

The Differences

First of all, a 501(c)(4) is defined by the IRS as meeting three criteria:

  • The group must be a civic league or organization that is not organized for profit but is operated exclusively for the promotion of social welfare.

  • The group is a local association of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality.

  • The net earnings of the group are devoted exclusively to charitable, educational, or recreational purposes.

You'll note some immediate similarities to the requirements for the 501(c)(3) status—in particular that the group is, in fact, operating as a not-for-profit. The big differences involve what types of activities the groups plan to undertake, with particular focus on political activities.

Whereas a 501(c)(3) is not permitted to advocate for a political candidate or ballot initiative, a 501(c)(4) may do so all it wants, as long as the activities fall within its primary purpose. The tradeoff is that contributions to a 501(c)(4) are deductible only if the organization is a government agency or is involved in public service. Otherwise, contributions may not be deducted from the personal income tax of the contributor.

If you meet all the other requirements pertaining to both classifications, are not planning to be directly involved in political campaigns, will not be lobbying to a large degree, and plan to solicit tax-deductible donations, consider applying for the 501(c)(3) status.

If, on the other hand, you meet all the other requirements pertaining to both classifications but do plan on being actively involved in political campaigns, will be conducting extensive lobbying, and understand that your contributors will generally not be able to deduct those contributions, then consider the 501(c)(4). Some groups have actually formed two separate tax-exempt organizations—a 501(c)(3) and a 501(c)(4), allowing one part of their organization (the c-3) to fully comply with the lobbying and campaigning restrictions and focus solely on the educational component, while the other (the c-4) conducts political outreach and activities.

The Federal Nonprofit Categories

Each category in the following table has precise rules governing how funds may be collected, whether contributors may also claim tax deductions for their donations, who may or may not participate in the organization, how money may be spent, and exactly what kinds of reporting are required to maintain nonprofit status. Some of the classifications are more entertaining than practical for the vast majority of people planning to form a nonprofit corporation and apply for a 501(c)(3). Look at them solely as a reference point in your planning.

▼ TYPES OF NONPROFIT ORGANIZATIONS

Section of IRS Code Type of Organization 501(c)(1) Corporations organized under an act of Congress 501(c)(2) Title-holding companies 501(c)(3) Religious, charitable, educational groups 501(c)(4) Groups that promote social welfare 501(c)(5) Labor, agriculture associations 501(c)(6) Business leagues 501(c)(7) Social and recreational clubs 501(c)(8) Fraternal beneficiary societies 501(c)(9) Voluntary employee beneficial societies 501(c)(10) Domestic fraternal societies 501(c)(11) Teachers' retirement funds 501(c)(12) Benevolent life insurance companies 501(c)(13) Cemetery companies 501(c)(14) Credit unions (not established by Congress) 501(c)(15) Mutual insurance companies 501(c)(16) Corporations to finance crop operations 501(c)(17) Supplemental unemployment benefit trusts 501(c)(18) Employee-funded pension trusts 501(c)(19) War veterans' organizations 501(c)(20) Legal services organizations 501(c)(21) Black lung trusts 501(c)(22) Withdrawal liability payment fund 501(c)(23) Veterans' organizations (created before 1880) 501(c)(24) Only one organization, Spring Prairie Hutterian Brethren Inc., in Hawley, Minnesota, is registered as a 501(c)(24) entity as a special trust under the Employee Retirement Income Security Act of 1974. 501(c)(25) Title-holding corporations or trusts with multiple parents 501(c)(26) State-sponsored organizations providing health coverage for high-risk individuals 501(c)(27) State-sponsored workers' compensation reinsurance organizations 501(d) Religious and apostolic associations 501(e) Cooperative hospital service organizations 501(f) Cooperative service organizations of operating educational organizations 501(k) Child-care organizations 501(n) Charitable risk pools 521 Farmers' cooperatives 527 Political organizations

Needless to say, most organizers planning to form a 501(c)(3) or 501(c)(4) nonprofit will probably not need all the information in this table. However, there may be situations where it may be advantageous to apply for another determination in addition to a primary classification. As your organization grows to maturity and everyone involved becomes comfortable with the opportunities and the limitations of your tax-exempt status—or if you find your operations are expanding beyond your original mission—it may be advisable to seek other exemptions, or perhaps form another unique organization.

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