Mario Vasquez on Comparing Nonprofit Organizations

Nonprofit Organizations are often classified according to what they do. While there are many different varieties of nonprofits, for tax purposes, some are classified as either a 501(c)(3) or 501(c)(4). These are classifications assigned by the IRS, and although they both involve nonprofit organizations, there are crucial differences between the two.

Differences Between c3 and c4

According to the Internal Revenue Service (IRS), 501(c)(3) and 501(c)(4) organizations are nonprofit entities that are excluded from paying federal income tax. 501(c)(3) organizations are a public charity, private foundation or private operating foundation whereas 501(c)(4) organizations are civic associations or leagues operated solely for the promotion of social welfare or local associations of employees with limited membership.

A significant difference between 501(c)(3) and 501(c)(4) organizations is the amount of lobbying efforts each can engage in. In a previous blog post, I explain lobbying efforts as a 501(c)(3), which are limited. However, 501(c)(4) organizations can engage in unlimited lobbying so long as it pertains to the organization’s mission. This also includes the ability to support any candidates running for public office. Furthermore, deductions also differ between the two types of nonprofits. Donations to a 501(c)(3) are completely deductible as a charitable contribution on the donor’s tax return. In contrast, contributions made to a 501(c)(4) are generally not deductible.

Starting a 501(c)(4)

If you are planning on starting a nonprofit and want to engage in lobbying and campaigning, the 501(c)(4) is a great option. If your goal is to change public policy, a 501(c)(4) can be an appealing choice but keep in mind that donors will not be able to claim a tax deduction.

There are multiple steps to follow when starting a 501(4)©. Federal tax law requires a 501(c)(4) organization to be formed as a corporation, a trust, or an unincorporated association. When starting an organization, be sure to follow state laws before filing any paperwork with the IRS. Additionally, each organization will need to obtain an employer identification number (EIN). Lastly, all tax-exempt organizations must submit a yearly tax report by filling out Form 990, 990-EZ or 990-N.

While charitable and social welfare organizations are quite similar, the differences are what set these two entities apart with the IRS and exempt status. Before starting any nonprofit, be sure to determine the goals of the organization.

Mario Vasquez has a diverse and extensive curriculum in both education, travel, and professional endeavors. He currently serves as an Attorney and Counselor at his own law firm in New York City, New York. Read more of Mario's blogs or follow him on Twitter!

Originally published at marioavasquez.net.