By Dean ‘Mac’ Nichols, Attorney
This is the first of a four-part series on nonprofit business entities.
501(c)(3) charitable organizations are the most common type of tax-exempt organizations, and are more often known as charitable organizations. These include public charities, private foundations, or private operating foundations.
The majority of 501(c)(3) organizations are nonprofit corporations, but trusts, community chests, LLCs, and unincorporated associations can also seek 501(c)(3) status. In order to qualify, an organization must be constructed and used exclusively for the following purposes:
• Religious
• Charitable
• Scientific
• Literary
• Educational
• Testing for public safety
• Fostering national/international amateur sports competition
• Prevention of child or animal cruelty
Section 501(c)(3), which provides for tax exempt status for these organizations, requires that: 1) they must be operated and organized exclusively for a proper exempt purpose; 2) no part of the organization’s net earnings inures to the benefit of any private shareholder or individual; 3) no substantial part of the organization’s activities consists of engaging in propaganda or attempt to influence legislation, and the organization does not participate in any political campaign; and 4) the organization operates as a common law charity.
There are some disadvantages to creating a 501(c)(3) organization, most of which stem from the strict operational restrictions that govern these entities. 501(c)(3) organizations must not engage in any political campaign activity and are only allowed to engage in “insubstantial” legislative activities unless they choose to be subjected to specific limitations regarding lobbying expenditures. If these restrictions are violated, excise taxes may apply, or worse, revocation of tax exempt status.
Barring unusual circumstances, however, 501(c)(3) organizations are tax-exempt entities. Donations to a 501(c)(3) organization are tax-deductible. There are other unique provisions for 501(c)(3) organizations that vary from state to state. Other advantages of a 501(c)(3) organization include that these entities may receive grants from private foundations without the assumption of expenditure responsibility by the foundation of the grant.
Interested in applying for 501(c)(3) organization status? Discuss your options with us today.
