Many nonprofit organizations pursue 501(c), or exempt, status from the Internal Revenue Service for tax benefits, and in some cases, to increase donations to the nonprofit. While there are 28 different types of exempt organizations, among the most common include 501(c)(3), 501(c)(4), and 501(c)(7) organizations. In most cases, nonprofits are formed under state law, while the IRS independently grants exempt status to qualified organizations.
501(c) organizations are nonprofits that are designated as "exempt" by the Internal Revenue Service. Referring to an organization as exempt means the nonprofit does not have to pay certain federal income taxes. Depending on the type of 501(c) organization, the designation may bring additional benefits, such as tax-deductible donations. The IRS recognizes 28 different types of nonprofit organizations as exempt, each type with their own rules and regulations to qualify. With the exception of certain churches and nonprofits with a small enough budget, all organizations must go through a somewhat rigorous application procedure before the IRS will recognize the nonprofit as exempt.
501(c)(3) Public Charity
The most common exempt designation is the 501(c)(3) nonprofit, also known as a "public charity." Many nonprofits apply for 501(c)(3) status for the tax exemption, and also because donations to 501(c)(3) organizations are tax-deductible for the donor, which may bring in more donations and provide more opportunities for grants. Public charities may be corporations, incorporated under state law. In order to qualify for the exemption, the nonprofit must be organized for charitable, religious, educational, or scientific purposes, and cannot be organized for the benefit of the creator or shareholders. Further, 501(c)(3) organizations are generally barred from all political activity. Examples of 501(c)(3) organizations include chapters of the Red Cross, schools, soup kitchens and churches.
501(c)(4) Social Welfare
The IRS grants 501(c)(4) status to social welfare organizations, civil leagues and employee associations. Generally, the status applies to organizations that exist to promote the common good and welfare of people in a certain community. To this end, the organization may not exist to benefit any individual. Unlike 501(c)(3)s, exempt organizations under this category may lobby to promote its exempt purpose, although the organization may not participate in a campaign for or against a particular candidate for office. Examples of 501(c)(4) organizations include volunteer fire companies, homeowner associations and local employee associations that use earnings for charitable, educational, or recreational purposes.
501(c)(7) Social Clubs
501(c)(7) status is granted to social or recreational clubs that are organized for recreation, pleasure or similar nonprofit purposes. The IRS requires that 501(c)(7) nonprofits provide "personal contact" between members, and membership must be limited, meaning that facilities may not be open to the public. The club may not discriminate on the basis of race, color, or religion. Like other exempt organizations, 501(c)(7)s may not exist to benefit any particular individual, but should instead use its profits to further the organization's exempt purpose. Examples under this category include, among others, garden clubs, college fraternities or sororities, and country clubs.