Nonprofits can include a large variety of organizations, including those focused on for-profit businesses. If your organization fits within the IRS’s guidelines, you can register with your state and the federal government as a 501(c)(6) organization and gain tax-exempt status. There are other benefits to registering as well. We have created this guide to walk you through the process.
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When people hear the word nonprofit, they automatically think of a local charity or large organization like the Red Cross. Nonprofits can include a large variety of organizations, including those focused on for-profit businesses.
If your organization fits within the guidelines, you can register with the federal government and your state as a 501(c)(6) nonprofit organization.
This type of nonprofit qualifies for tax-exempt status with the federal government and can accept donations. There are other benefits to registering as a 501(c)(6) as well. We have created this guide to walk you through the process.
A 501(c)(6) nonprofit organization is an association that promotes higher business practices and better business methods along with establishing integrity within an industry. Although they may benefit specific businesses, they do not make a profit for themselves or their board members like other nonprofits.
Types of nonprofits that qualify for 501(c)(6) tax-exempt status are:
The most recognized 501(c)(6) organization is the U.S. Chamber of Commerce. This organization is the “world’s largest business organization and represents companies of all sizes and across every sector of the economy.” Nonprofits like the Chamber of Commerce gain their tax-exempt status because they promote goals that benefit the entire economy.
Whether your nonprofit is organized as a 501(c)(3) or a 501(c)(6), there are benefits. Both statuses are exempt from filing federal taxes. Each of these types of organizations must first file for tax-exempt status with the IRS. As a 501(c)(3), your organization can either file Form 1023 or Form 1023EZ. But if your nonprofit is a 501(c)(6), you will fill out Form 1024.
Each type of nonprofit may also be exempt from state and local taxes, depending on the state.
Both 501(c)(3) and 501(c)(6) organizations can also accept donations. However, the difference here lies in which types of donations qualify as tax-deductible for the donors. Donations to 501(c)(3) nonprofits are tax-deductible as charitable donations for companies and individuals. But donations to 501(c)(6) nonprofits can only be tax deductible for businesses if the nonprofit benefits their company.
One of the most significant differences between these two types of nonprofits is their ability to lobby government officials. 501(c)(3) nonprofits can take part in some lobbying practices but must limit these acts. 501(c)(3) nonprofits can also engage in advocacy for certain issues and can be part of voter registration drives, as long as they don’t support a specific candidate. Any more involvement in lobbying can endanger their tax-exempt status.
501(c)(6) organizations can engage in unlimited lobbying to benefit their mission and can campaign for their favorite candidates as long as it is not their main activity. Moreover, 501(c)(6) organizations are often largely involved in political campaigns and understand the importance of helping to elect certain politicians to pass laws that benefit their organization. According to the Nonprofit Law Blog, “some 501(c)(6) organizations spend 49% of their resources on electioneering.”
As you can see, there are quite a few benefits to being a 501(c)(6) organization. If your organization is looking for tax-exempt status under this status, the IRS has a list of requirements.
The purpose of these nonprofits is to promote the business types of their members. The New York Bar Association is an example of an association of lawyers combining to “shape the development of law, educate the public, and respond to demands for legal professionals.”
While all nonprofits must find ways to fund their efforts, 501(c)(6) nonprofits must have members who provide meaningful support for the organization. Membership dues can be collected monthly, quarterly, annually, or biannually. These dues give an organization funds that can be counted on and included in its annual budget.
In exchange for their dues, members will expect benefits for their businesses as well, so it is crucial to define your membership program as much as possible. We have written an article on How to Run a Successful Nonprofit Membership Program.
In addition to membership dues, the IRS does allow additional funds to count as membership support. Any gift from the public and any income from the organization’s exempt activities can provide a substantial part of its income.
Like other 501(c)(3) organizations, to gain tax-exempt status from the IRS, your organization cannot generate a profit.
No shareholders or board members can financially benefit from a 501(c)(6) organization.
The Bitcoin Foundation is an excellent example of an organization formed to improve business conditions. Its mission is to increase awareness, educate the public on cryptocurrency, and build Bitcoin into a “globally accepted method of exchange.” This organization was founded to restore credibility to Bitcoin after scandals and upheaval in the market.
According to the IRS, a “line of business” is a trade or occupation that is not restricted by patents, trademarks, or any other means that restrict rights to engage in the business.
If an organization is created to perform services that benefit its members, it does not qualify for a 501(c)(6) tax exemption. An example the IRS gives of organizations that do not qualify is a group of merchants in a shopping center that advertise together.
Any organization that engages in regular for-profit business cannot be tax-exempt. Several organizations have been denied 501(c)(6) status because of this, including:
And more. Theses organizations did not receive 501(c)(6) status because they engaged in some for-profit business endeavors.
Many of the steps to incorporate are similar regardless of the type of nonprofit. But the following steps are especially important to starting a 501(c)(6) organization. For more information on creating a nonprofit, visit our blog post on Starting a Nonprofit Organization.
In every organization, it is essential to know your purpose or mission.
Your organization’s mission is the reason you exist. A mission statement will answer why you exist, who you help, and why others should give to your organization. Without a detailed and well-thought-out mission statement, your organization will fail to connect with people.
If you are having difficulty defining your mission or creating a mission statement, read more on How to Write an Awesome Nonprofit Mission Statement.
Once you have defined your purpose, naming your organization, choosing board members, and creating programs and membership benefits for your organization becomes much easier. Each state will have different requirements for naming your organization and for selecting board members, so be sure to research your local and state laws.
The IRS requires that 501(c)(6) organizations be membership organizations. Members of these organizations must have a common business interest and pay membership dues to fund a combined goal.
Membership dues should make up a significant chunk of your budget as a 501(c)(6), and the benefits of this are obvious. Membership dues can be monthly, quarterly, annually, or biannually. These dues are money your organization can count on and you can add it to your budget and financial planning at the beginning of your fiscal year.
The trouble with many membership organizations is continuing to offer enough benefits to encourage membership and fund the organization. Often members will start out strong and simply disappear along with their dues.
There are ways to encourage membership, though. By taking a few small steps, you can increase your membership and the dues that come with it. Before starting your own membership organization, check out the tips below!
An easy, online membership form will help you connect with more members. With Donorbox, you can create a customizable online membership application with your organization’s branding and membership options. Keep your application simple, so you do not overwhelm members before they sign up.
For example, check out how easy New York Urban League made it for their members to register through their Donorbox-hosted membership form.
Membership with your nonprofit should feel like having VIP status. So, if your members do not feel special and like they could get more somewhere else, they will. Events and experiential activities that are unique to your members are a great way to help your members feel special and keep them coming back for more.
Are your members all lawyers or architects? Why have they joined your organization? It is essential to ask yourself these questions when determining member benefits.
Your member benefits should fit within the purpose of your organization and appeal to members based on the reasons they have joined. It is best to keep your membership levels limited to only a few and be clear on what members get with each level.
Your members are the reason your organization exists in the first place. As your nonprofit grows, it is easy to forget to communicate with your membership, but without this crucial step, members feel ignored and will lose interest.
Communication should be frequent, and you must conduct it in many different ways. Members will have different expectations and desires in how they would like to hear from you, so keeping track of each member’s needs and wants with a quality donor management system will make your member communication more successful.
Donorbox’s donor management system includes the ability to create custom donor profiles, segment donors by donation amount or time, and the ability to keep track of your members’ actions through notes and moments.
By detailing your members’ actions and desires, you can send communication pieces that work for them and will get a better response rate. Communication is key to building strong donor and member relationships.
A board of directors can determine the success or failure of a nonprofit organization. When building your board, it is tempting to find whoever is willing to help at the organization’s start. But remember that the beginning of your organization is the most critical time for a board of directors; since these board members will write the bylaws and other regulations that create the foundation for your nonprofit.
As your nonprofit continues to grow, the role of a board member does too. They will need to spread the word about your organization throughout the community, serve on committees that establish programs and events, and review the organization’s budgets and financial statements, to name only a few of the duties expected.
Some board members will take on the officer roles of President, Vice President, Treasurer, and Secretary, which will take even more time and effort on their part.
Finding potential leaders in your community to fill these roles and others can be time-consuming and a struggle if you do not know where to start. For more information about what board members do and how to recruit the right members for your board, check out our blog post here.
When incorporating any organization, the IRS requires you to obtain an Employer Identification Number (EIN). The process to file for this number is simple and can be done with federal Form SS-4.
The EIN is a nine-digit number for every organization in the United States, and you can use it to file your taxes in the future. You can file this form online for an immediate response. However, filing by fax or mail will take longer, usually up to four or five weeks.
The articles of incorporation are necessary for most states. Here are some essential requirements:
Your organization’s official name: You will need to check with your state on the requirements for naming your organization. Each state has different rules, so be sure to visit your state’s Department of State to choose a name.
Physical address.
Registered agent name and address: A Registered Agent is responsible for receiving all legal notices for your organization. This can be an individual or company but must have a physical location in the state and be open during regular business hours.
List of board officers and physical addresses: States also expect your organization to have an Incorporator to sign the Articles of Incorporation for your nonprofit. It does not have to be a board member.
Organization’s purpose: It is essential to clarify your organization’s purpose on this application and all other legal documents. Remember to use the exact wording of your organization’s purpose on all legal documentation with the state and federal government.
Membership program details: Most states ask if your organization is a membership organization on the Articles of Incorporation. As a 501c6 organization, you must have members. Hence, be sure to make this clear on your application.
Start date of your organization: The start of your organization is usually once your articles of incorporation application have been approved. Some states offer the option to choose a different date.
Remember, the process to file your articles of incorporation is different in each state. Like in Pennsylvania, you will need to publish your intent to incorporate and your incorporation with two different state newspapers during the application process.
To find your state’s requirements for starting a nonprofit, visit our blog and do your due diligence when researching this process with your local government.
Once you have an EIN and articles of incorporation, you can file for your tax-exempt status with the IRS. You must file Form 1024 online or by mail to become a 501(c)(6) organization.
Your application will need to include your EIN, articles of incorporation, your organization’s purpose, and other detailed information like a list of your organization’s specific activities.
Remember to keep the wording of your organization’s purpose exactly the same as you included in your articles of incorporation and other legal documents. Because the IRS will check this wording and potentially deny your application if it is different.
Financial statements are mandatory on Form 1024 if applicable. This includes a detailed breakdown of revenue and expenses for your organization and any proposed budgets for the upcoming years.
The application will also need to be signed by an officer, trustee, or someone with power of attorney for the organization. This can be the same Incorporator who signed your articles of incorporation.
Form 1024 is long and can be confusing at times, but the potential for tax exemption makes it worth the trouble.
Proof of your tax-exempt status with the IRS is your Letter of Determination. To obtain this letter as a 501(c)(6) organization, you must attach Form 8718 with Form 1024 when filing for federal tax exemption. This form will include a fee (generally $600). Once you have filed the form and they’ve accepted your application, your letter of determination will be mailed, and you can contact your state for all local tax-exempt options.
Each state is different when it comes to filing for tax-exempt status. Some do not offer state tax exemptions at all. Others will ask you to fill out an application or use your letter of determination when purchasing an item for your organization.
Contact your local, county, and state departments for all state tax-exempt options.
When starting a 501(c)(6) organization, the time it takes will often depend on you and how quickly you can get it done. There are steps in the process that will require some waiting, though. When filing your Articles of Incorporation, the time it takes to get accepted will depend on the state.
The longest amount of time will be when you apply for your 501(c)(6) tax-exempt status with the IRS. After applying, your letter of determination will generally reach you within 90 days. If you have made any mistakes or if the IRS is overwhelmed with applications, the process may take longer.
The required fee for your letter of determination is generally $600. The IRS may change the cost of this fee in the future.
Any other costs for your articles of incorporation and state tax exemption will depend on the state your organization is in.
Yes, but donations to a 501(c)(6) are not tax-deductible for charitable reasons. This information should be present in any solicitation material.
Unlike 501(c)(3) organizations, donations to a 501(c)(6) organization are not tax-deductible for charitable reasons. Membership fees and gifts made by businesses can be deductible as trade or business expenses if necessary to the donor’s business.
As a 501(c)(6) organization, your nonprofit will benefit business members of your community. Their loyalty and word of mouth will determine the success of your organization. When starting your organization, be clear about your purpose. Choose your board and membership programs with this in mind.
Donorbox provides tips to help with donor stewardship, fundraising events, strategic plans, annual reports, and more. Visit our website for a list of online features we offer to nonprofit organizations of all sizes.
Kristine Ensor is a freelance writer with over a decade of experience working with local and international nonprofits. As a nonprofit professional she has specialized in fundraising, marketing, event planning, volunteer management, and board development.
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Kristine Ensor