Pros & Cons of the 501(c)(3)

By John Cromwell

There are more than 1 million 501(c)(3) organizations, otherwise known as nonprofits, in the United States serving a variety of charitable causes. The process of becoming a nonprofit is time-consuming and should not be entered into lightly. When evaluating whether to become a 501(c)(3), consider what your organization’s goals are and how your business plans to get money. These are two factors that should assist in determining whether your organization should file to become a 501(c)(3).

There are more than 1 million 501(c)(3) organizations, otherwise known as nonprofits, in the United States serving a variety of charitable causes. The process of becoming a nonprofit is time-consuming and should not be entered into lightly. When evaluating whether to become a 501(c)(3), consider what your organization’s goals are and how your business plans to get money. These are two factors that should assist in determining whether your organization should file to become a 501(c)(3).

Pro: Tax Exemption

The chief benefit of a 501(c)(3) is that it is generally exempt from paying tax on its income. Nonprofits are still required to pay employment taxes for its employees. Nonprofits also pay taxes on “unrelated business income.” Unrelated business income is generated by ongoing activities of the 501(c)(3) that are not related to the nonprofit’s core charitable purpose. This income is taxed regardless of whether the income is used to support the charitable purpose. So for example, if a 501(c)(3) dedicated to minimizing poverty sells computers, the revenue from those sales are taxed even if all the proceeds are used to help the poor.

Ready to form a nonprofit? Get Started Now

Pro: Tax-Deductible Donations

Most donations made to a 501(c)(3) can be used as a tax deduction by the donor. If the donor itemizes his deductions, he can use his donations to decrease his taxable income, which in turn decreases his personal tax liability. The reason the government permits donors to deduct their donations from their income is to promote charitable giving.

Con: Registration with IRS

Applying for 501(c)(3) is a very long process and there is no guarantee that the IRS will grant nonprofit status. A prospective nonprofit must first organize as a corporation, trust, or unincorporated association. Next it must get an Employer Identification Number (EIN). Once the organization has completed these tasks it can apply for 501(c)(3) status by submitting a completed Form 1023 and registration fee to the IRS. After reviewing your application, the IRS issues a determination letter that will inform you whether you qualify as a nonprofit.

Con: No Distribution to Officers

A 501(c)(3)s is prohibited from distributing any of its proceeds to its board members and officers. While the organization can pay a reasonable salary, the remainder of the organization’s assets must be used to achieve its charitable purpose. If a 501(c)(3) transfers excess assets to, or enters into a transaction with, one its officers or board members, the person may be charged an excise tax on the proceeds as a penalty.

Ready to form a nonprofit? Get Started Now
Non Profit Vs. for Profit Business: The Differences

References

Related articles

Can a 501(c)(3) Donate to a 501(c)(4)?

A nonprofit organization formed under a state statute can apply for exemption from federal income taxes under one of the various provisions of Internal Revenue Code (IRC) section 501(c). The most popular section is 501(c)(3), which exempts public charities from paying taxes on income and also allows donors to those charities to claim a tax deduction for their donation against their income. Other sections of 501(c), such as 501(c)(4), which exempts civic leagues and social welfare organizations, allow other types of organizations to apply for tax-exempt status, but donations to these organizations are not tax-deductible. The benefit of being a 501(c)(3) comes with increased restrictions on the types of activities the nonprofit can engage in and support.

How to Start a 501C3 Nonprofit Ministry

Charity work is often part of a church's activities -- and some churches may choose to expand their charitable work by forming an independent nonprofit ministry. A 501(c)(3) organization is a nonprofit entity formed under state law and granted tax-exempt status by the IRS under section 501(c)(3) of the Internal Revenue Code. To qualify for exemption from federal income tax under IRC section 501(c)(3), your ministry must operate and organize exclusively for religious, educational, scientific or other charitable purposes.

Differences Between a 501(c) and an L3C

The low-profit limited liability company, known as L3C, is a new organizational form that is now available for charitable organizations. The traditional method for organizing a charitable group is to file for 501(c) status with the Internal Revenue Service. Despite these organizational structures' shared focus on charitable purposes, they have some key differences regarding federal taxation, fundraising and distribution of organizational assets. Also, the group's location may influence the organizational options that are available. When considering which organizational type to pursue, consider consulting with an attorney.

Doing the right thing has never been easier.

Related articles

Non-Profit C4 Vs. C3

Title 26, Section 501(c) of the Internal Revenue Code recognizes several different types of nonprofit organizations. ...

Can a Non-Profit Sell a Donated Vehicle to One of Its Members?

One of the generous donors of your animal rescue organization donates an immaculately maintained BMW for its use. While ...

What is the Difference Between a 501C3 & 501C4?

Many nonprofit organizations are created for the purposes of providing some benefit to the public. Depending on the ...

Rules & Regulations for Non Profit Foundations

Nonprofit foundations that meet certain requirements are eligible for special tax treatment by the IRS under Section ...

Browse by category