Did you know there is a difference between a nonprofit and a charity? The Internal Revenue Service (IRS) gives over 29 organization types exemption from paying federal taxes. Two of these organization types are 501(c)(3) and 501(c)(6). While each is tax-exempt, there are several differences. Read more to learn the differences between the two.
The Internal Revenue Service (IRS) states that both 501c3 and 501c6 organizations do not have to pay federal income taxes, but after that, the differences between the two organization types are vast. The primary difference between the two has to do with the organization’s purpose. This article will give you a thorough understanding of other differences and similarities between 501(c)(3) and 501(c)(6) organizations.
501(c)(3) organizations must serve the public. 501(c)(6) organizations are formed to serve their members. 501(c)(6) organizations are often termed nonprofit membership organizations and non-charitable organizations as well. Let’s explore the major differences.
501(c)3 Vs 501(c)(6) organizations may be exempt from paying federal taxes, but these two organizations have many noticeable differences that become apparent as soon as you look at them.
The IRS states that to be tax-exempt, a 501(c)(3) must be organized and operated exclusively for one or more exempt purposes. These purposes are limited by the IRS to the following –
Organizations like For the Love of Alex qualify as 501c3 organizations for their work saving the lives of animals and supporting low-income pet owners. On the other hand, those like the Catholic Charities of Santa Clara County are organizations created to promote religion. Some other notable 501c3 organizations include the New York Cancer Foundation, Sista Afya Community Mental Wellness, and Healthcare for the Homeless.
A 501(c)(6) organization is an association of persons having common business interests. The organization’s purpose must be to promote their common interest and improve business conditions, not to engage in a regular business for profit.
501c6 organizations include the following –
There are thousands of local chambers of commerce formed around the country to support their members all qualify as 501(c)(6) organizations. Some other good 501(c)(6) organizations include the Drone Service Providers Alliance and the National Board for Health and Wellness Coaching.
The distinct difference between 501c3 and 501c6 organizations is in their underlying purposes. The goal of most 501c3 organizations is charitable, while 501c6 organizations are mainly business or membership nonprofits.
Let’s have a look at this comparison table before we take a deeper dive.
Next, we’ll discuss each category in detail for an in-depth insight into each.
The first comparison comes in getting the respective nonprofit status from the IRS. For 501(c)(3), the tax-exempt status comes by filing Form 1023 or Form 1023-EZ with the IRS. The cost of the same would be either $600 or $275.
For 501(c)(6), nonprofits need to file Form 1024 to get their respective tax-exempt status. In addition, they’ll have to attach Form 8718 to Form 1024 to receive their Letter of Determination. This works as proof of their tax-exempt status. The cost for filing Form 1024 remains at $600.
501(c)(3) organizations’ primary goal is charitable or educational. They must perform activities that benefit the public through services like housing, food distribution, education, religion, or other publicly beneficial actions.
In addition to providing services, 501(c)(3) organizations are responsible for informing and educating the public about their missions and causes.
501(c)(3) nonprofits can advocate and lobby for their causes within reason.
The IRS does not see 501(c)(6) organizations as charitable organizations. Instead, these organizations are formed to support their members’ business activities.
501(c)(6) organizations have less strict regulations regarding lobbying.
As we said, 501(c)(3) organizations can lobby for their organization’s purpose and activities but there are limits. The IRS ensures that 501(c)(3) organizations cannot –
501(c)(3) private foundations cannot engage in lobbying but can provide funding for nonprofits used for lobbying.
On the contrary, 501(c)(6) organizations can participate in unlimited lobbying as long as it relates to their purpose. They must notify their members about the percentage of dues used for lobbying. If they don’t, the IRS will assess a proxy tax penalty.
The most significant difference between 501(c)(3) and 501(c)(6) organizations when it comes to political activity is electioneering. Electioneering is when organizations actively take part in election campaign activities. Some 501(c)(6) organizations spend 49% of their resources on electioneering. 501c3s cannot take part in electioneering.
Both types of organizations must comply with IRS registration and reporting requirements regarding all lobbying activities.
501(c)(3) nonprofits can receive tax-deductible donations. These donations are considered charitable contributions, and donors can report them on their annual taxes. Donors can receive tax deductions for cash and property gifts.
501(c)(3) nonprofits may also offer memberships to their supporters for a monthly fee. These fees are tax-deductible.
501(c)(3) organizations have a distinct fundraising advantage over 501(c)(6) organizations. 501(c)(6) organizations can accept donations, but these gifts are not tax-deductible as charitable donations.
For 501(c)(6) organizations, membership fees are tax-deductible, but only for members who can claim these fees as business expenses.
The IRS may also require 501c6 organizations to report that donations and fees are not tax-deductible to the public and pay a proxy tax in connection with these fees.
501(c)(3) organizations can give and receive grants as long as they further their purpose. Most grants are meant for charities.
On the other hand, 501c6 organizations can receive grants if the grant organization allows them to apply.
501(c)(3) and 501(c)(6) organizations have several differences, but there are a few similarities.
Both organizations are exempt from paying a federal income tax, but only 501(c)(3) may be exempt from state and local taxes.
Both organizations must file Form 990 to prove they benefit the public or the organization’s membership.
501(c)(3) and 501(c)(6) organizations’ earnings cannot substantially benefit an individual or private shareholder. If they’re found to benefit an individual with influence over the organization, the IRS can impose an excise tax on the individual. The organizations will lose their tax-exempt status.
Finally, while 501(c)(6) organizations are membership nonprofits, both 501(c)(6) and 501(c)(3) organizations may have members.
Many people need clarification on the differences between 501(c)(3), 501(c)(4), and 501(c)(6) organizations.
Each of these organizations is tax-exempt, but the key differences apply to their political activities.
501(c)(3) organizations can perform some lobbying activities if they are directly related to the charity’s mission. There are several restrictions, including those on supporting campaigns and political parties.
501(c)(6) organizations are given more freedom by the IRS to take part in lobbying and electioneering.
501(c)(4) organizations are trade unions, social welfare organizations, and civic leagues. 501(c)(4) can endorse political candidates, and there are no limits on its political lobbying. Thanks to the Supreme Court decision, Citizens United, 501(c)(4) organizations can also spend unlimited amounts through PACs to endorse candidates that align with their mission.
501(c)(4) donations are not tax-deductible as charitable donations. However, members of these organizations may be able to deduct fees as business expenses.
The differences between 501(c)(3) and 501(c)(6) organizations can be confusing, but this article should help define the two and support you in determining which type of organization you wish to start.
Visit our website for more information on creating your 501(c)(3) or 501(c)(6) nonprofit. If you are interested in learning more about the differences between 501(c)(3) and 501(c)(4) organizations, read our article on the subject.
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Note: By sharing this information we do not intend to provide legal, tax, or accounting advice, or to address specific situations. The above article is intended to provide generalized financial and legal information designed to educate a broad segment of the public. Please consult with your legal or tax advisor to supplement and verify what you learn here.
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