When you think of a nonprofit, you might imagine a 501c3 charity. But, did you know that the United States tax code recognizes 29 types of tax-exempt organizations? A 501c4 organization is one of them.
IRS Code 501(c)4 provides for the federal tax exemption of certain civic leagues, social welfare organizations, and local associations of employees that meet specific criteria and complete the steps to apply for 501c4 status.
Starting a 501c4 requires hard work and lots of careful planning. But, when done right, starting a 501c4 organization can be an incredibly rewarding, purpose-filled experience that helps your community.
In this post, you’ll learn the step-by-step process of how to start a 501(c)4 social welfare organization:
A 501c4 is a tax-exempt organization that exists to promote causes related to social welfare. 501c4 organizations are commonly active in political and advocacy-related causes.
The IRS explains more about these groups under Section 501(c)4 of the tax code. Interestingly, the IRS notes that providing an exact definition of what types of organizations can be a 501c4 is a bit tricky:
“Although the Service has been making an effort to refine and clarify this area, section 501(c)(4) remains in some degree a catch-all for presumptively beneficial nonprofit organizations that resist classification under the other exempting provisions of the [501c] Code.”
For example, the Planned Parenthood Action Fund, Sierra Club, National Rifle Association, and American Civil Liberties Union are all high-profile 501(c)(4) organizations engaged in political dialogue and action.
One important note is that while 501c4 organizations are tax-exempt, donations to a 501c4 are not tax-deductible for the donor.
When you have a cause you’re passionate about and a well-thought-out plan, starting a tax-exempt organization can be a great way to make an impact.
But, how do you know whether you should file as a 501(c)(3) charity or a 501(c)(4) social welfare organization? What are a 501c4’s advantages over a 501c3? There are some key differences between the two that will impact your choice.
The IRS allows several types of organizations to be exempt under Section 501(c)(4). These include social welfare organizations and local associations of employees. Here, we’ll review the definition of each, along with some 501c4 examples.
What exactly is a social welfare organization? The IRS notes that the term social welfare is “inherently an abstruse concept that continues to defy precise definition.” However, the IRS does provide for a working definition: “organizations that may be performing some type of public or community benefit but whose principal feature is a lack of private benefit or profit.”
Examples of 501c4 social welfare organizations:
Groups of employees can create a tax-exempt organization to provide for their charitable, educational, or recreational purposes. Membership must be limited to employees of a designated person or persons in a particular municipality.
“Educational” purposes can include training workers to improve their capabilities as well as instructing the public on topics that are useful and beneficial to the community. Click here to read more about IRS guidelines for 501(c)4 employee associations.
Examples of 501c4 employee associations:
Dig deeper and view more examples of 501c4 organizations from the National Center for Charitable Statistics.
While starting a 501c4 comes with its advantages, there are also restrictions to be mindful of, and 501c4 requirements. One important restriction to note is that donations to a 501c4 are not tax-deductible.
Of course, your 501c4 must meet the IRS criteria to be tax-exempt. For example, some restrictions on 501c4s include:
Additionally, while having a 501c4 arm of a 501c3 nonprofit can be a useful tool, this arrangement can lead to trouble if not done properly. Running a 501c4 alongside a 501c3 requires strict bookkeeping and accounting practices to ensure ongoing IRS compliance.
You may also want to hire a lawyer and/or accountant to help manage your 501c4. While this can involve ongoing costs, it can also help your organization prevent costly legal or accounting blunders down the road.
Since the Supreme Court’s “Citizens United” ruling in 2010, 501(c)(4) organizations have played an increasing role in politics. This ruling cleared the way for corporations and labor unions to spend an unlimited amount of money through 501c4 organizations toward political causes and candidates.
Applications for 501c4 organizations more than doubled after this ruling. And, there is no limit to what an individual can spend in order to support or oppose a political candidate if the money goes through a 501c4 organization.
Because 501c4s are not required to disclose their donor information, their spending is sometimes referred to as “dark money.” The Center for Responsive Politics notes, “Spending by organizations that do not disclose their donors has increased from less than $5.2 million in 2006 to well over $300 million in the 2012 presidential cycle and more than $174 million in the 2014 midterms.”
Starting a 501c4 comes with pros and cons – and it’s a choice that only you can make. On the upside, starting a 501c4 comes with the obvious benefit of being a tax-exempt organization. Plus, your 501c4 can engage in political activities with far fewer restrictions than a 501c3 nonprofit. For example, a 501c4 can endorse political candidates whereas a 501c3 cannot.
501c4 organizations may not have to disclose their donors, which can be both a pro and a con. On the plus side, this can provide privacy and anonymity for your supporters. On the other hand, choosing to not share this information may make your organization seem less trustworthy and transparent.
The cons of starting a 501c4 include the need for ongoing time and energy spent on administration, financial, and legal compliance. Plus, your supporters will generally not be able to get a tax deduction for supporting your 501c4, which can, in some cases, de-incentivize people from giving money toward your cause.
What is it that you’re trying to accomplish? How will the world be a better place because of your 501c4 organization? It’s important to be able to clearly articulate this verbally and in writing.
Being able to share your organization’s purpose is critical when it comes to filing your official paperwork, raising funds for your cause, and attracting stakeholders. When people know exactly what your organization is aiming to accomplish, it’s easier for them to understand and support the movement.
This step can be daunting for many people, but it can also be a fun part of the process. You’ll want to pick a name that’s memorable, descriptive, and unique. Be sure to do an online search for any 501c4 name ideas you’re considering.
Pro Tip: Before you file any paperwork, check whether your preferred name’s web domain is available for a reasonable price. Look to see whether your desired social media handles are claimed on popular sites like Facebook, Instagram, YouTube, and even TikTok.
Your board of directors should include a President, Treasurer, and Secretary, at minimum. The IRS requires a board of directors consisting of at least three people to qualify for tax-exempt status.
When selecting your board, it’s a good idea to ensure that your board composition reflects the community of people your organization will be representing or supporting. Be sure to also pursue board members who have the time, energy, and passion to contribute to the organization.
Work with your board of directors to create your 501c4’s bylaws. These rules define how your organization will govern itself and administratively function. Think of your bylaws as a roadmap that will help your organization grow, make decisions, and operate smoothly. Having solid bylaws in place can help prevent confusion and conflict down the road.
Your bylaws will generally include things like the purpose of your organization, its governing structure and leadership roles, details on meetings and voting procedures, and the process by which amendments to the bylaws may be passed. Wondering where to start? Donorbox has a whole blog post devoted to best practices for nonprofit bylaws!
The 501c4 requirements and filing processes vary state by state. To figure out what’s required in your area, contact your secretary of state or visit their website.
Your local Secretary of State’s office can help walk you through the filing requirements for your state. Or, connect with a local attorney in your state who specializes in working with tax-exempt organizations. They can help you navigate through any local requirements and may also be able to connect you with local resources and partners.
You can apply for an EIN electronically through the IRS. You’ll be asked to provide some personal information such as your social security number. Additionally, you’ll have to provide details about your 501c4 including a name, address, phone number, and some basic questions about your organization’s purpose and other details.
The EIN application is relatively straightforward and simple. A one-page online form, it can be filled out in just a few minutes if you have your 501c4’s basic information handy.
The IRS requires an organization to notify them of its intent to operate as a Section 501(c)(4) organization. To do this, you must electronically fill out Form 8976. You’ll also be required to electronically submit a $50 fee along with your application. This does not require any special software, but you will be required to create a login ID and password.
The Form 8976 application will ask you to provide information such as an email address, your organization’s business name, and address, your EIN, date organized, and statement of purpose. You’ll only have to fill this form out once – however, as outlined in Step 9, you will need to fill out ongoing paperwork for your 501c4.
This form is the application for recognition of exemption under Section 501(c)(4) of the Internal Revenue Code. You must electronically file this form by registering for an account on pay.gov. You’ll also be required to electronically pay a $600 user fee.
To prepare ahead of time and get an idea of what information you’ll be required to provide, view the form 1024-A instructions here. While 17 pages of instructions may seem daunting, take this as a good sign. The IRS’s instructions are thorough, helping to walk you through each step of this paperwork. Plus, some sections will not apply to your organization.
Each year, your organization will be required to file a Form 990 with the IRS. Because this is such a common and frequently filed form, the IRS provides a variety of resources around this topic. You can find an interactive training session that will walk you through the process of filing your 990.
There are a variety of different types of 990 forms. Which form you must file will generally depend on your 501c4’s financial activity – more specifically, the number of its gross receipts and total assets.
In this section, we’ve answered some of the commonly asked questions about how to start a 501c4 organization.
The short answer is: it varies, but plan for this process to take at least a few months. The IRS can take time to process your filing paperwork, especially during peak times. It’s helpful to be realistic and err on the side of things taking longer than you might expect. If you’re waiting for your paperwork to be returned, it’s a great time to work on other plans for your organization, such as brainstorming marketing and fundraising campaigns or recruiting people who might be interested in volunteering.
For example, the IRS’s website for filing a Form 8976 (Step 7, above) notes that you’ll receive an acknowledgment within 60 days of submitting your paperwork. This is just one of several steps involved in creating a 501c4.
There are some filing fees involved with starting a 501c4, including the $50 due with your Form 8976 and the $600 user fee associated with filing a Form 1024-A. Furthermore, some people choose to hire an attorney, accountant, or administrative support to set up and run their 501c4.
Generally, no. Unlike with a 501c3 nonprofit, donations to a 501c4 organization are not tax-deductible for donors in most instances.
The IRS does share that donations to a 501c4 “ may be deductible as trade or business expenses, if ordinary and necessary in the conduct of taxpayer’s business.”
Additionally, donations to volunteer fire companies are deductible on the donor’s federal income tax return, but only if made for exclusively public purposes. This also applies to certain war veteran organizations. In these instances, substantiation and disclosure requirements may apply.
Yes! According to the IRS, a 501c4 may endorse or oppose political candidates and engage in political campaigns. But political activities shouldn’t be the primary purpose of the organization.
A 501c4 may also engage in an unlimited amount of lobbying, so long as the lobbying is related to the organization’s exempt purpose.
As you can see, starting a 501c4 requires careful planning as well as a significant investment of time and energy. From recruiting board members to raising funds, to filing administrative paperwork, and keeping on top of accounting. There are many steps involved with starting a 501c4 social welfare organization. You’ll also have to be mindful of ongoing compliance considerations.
But, if you’re equipped with passion, drive, and knowledge, your hard work can pay off. Starting a 501c4 can be a meaningful way to help your community for years and even generations to come.
As you start or grow your 501c4 organization, we wish you well on your journey!
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