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501(c)(3) vs 501(c)(4) For Nonprofit Organizations Explained
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Registering a nonprofit organization in the United States can help companies become tax-exempt. As such, they would not pay taxes on income from activities tied to their “core mission”. This article compares the two common registration types: the 501(c)(3) and 501(c)(4) approaches.
Comparing 501(c)(3) With 501(c)(4)
A nonprofit organization is a corporation or an association that conducts business for the public good. Nonprofits are formed for religious, charitable, scientific, literary, or educational purposes. There are two types of nonprofit organizations in the United States: 501(c)(3) and 501(c)(4).
The main difference between a 501(c)(3) and a 501(c)(4) is that 501(c)(3) organizations are prohibited from engaging in political activity, while 501(c)(4) organizations are not. That means that 501(c)(3) organizations can only engage in activities that further their charitable, religious, or educational mission.
They cannot lobby for or against political candidates or engage in any other political activities. Meanwhile, 501(c)(4) organizations can engage in political activity as long as it is not their primary activity.
Both Have Benefits And Drawbacks
Benefits of 501(c)(3) status:
– 501(c)(3) organizations can receive tax-deductible donations.
– 501(c)(3) organizations are exempt from paying federal corporate income tax.
– 501(c)(3) organizations can apply for government grants.
Drawbacks of 501(c)(3) status:
– 501(c)(3) organizations cannot engage in political activity.
– 501(c)(3) organizations must disclose their finances to the public.
Benefits of 501(c)(4) status:
– 501(c)(4) organizations can engage in political activity.
– 501(c)(4) organizations do not have to disclose their finances to the public.
Drawbacks of 501(c)(4) status:
– 501(c)(4) organizations cannot receive tax-deductible donations.
– 501(c)(4) organizations must pay federal corporate income tax.
– 501(c)(4) organizations cannot apply for government grants.
Conclusion: Which Is Better?
The answer to this question depends on the organization’s specific goals and purposes. A 501(c)(4) will be the better choice if the organization’s primary purpose is to promote social welfare. A 501(c)(3) will be the better choice if the organization’s primary purpose is to provide charitable assistance.
The choice is not an easy one to make. Registering for either status requires careful thought ad evaluations of the benefits, drawbacks, and what the company aims to achieve in the long run.
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