Rules for 501(c)3 Corporations

By Bryan Driscoll, J.D.

Rules for 501(c)3 Corporations

By Bryan Driscoll, J.D.

Charitable organizations, referred to as 501(c)3 corporations, have several rules with regard to their operations, tax preparation, and overall compliance. 501(c)3 is an Internal Revenue Service (IRS) designation for tax status of charitable organizations. The government recognizes the value of charities and provides certain tax benefits to these companies.

Woman standing in a store holding a box of donations

501(c)3 Tax Exempt Status

When a corporation is classified as a 501(c)3, it is exempt from certain taxes. Charities with this designation don't have to pay taxes on the donations it receives in the form of cash or items.

This helps the charity stretch its money. When the corporation doesn't have to pay taxes, it can use all of the donations to better the community.

Types of 501(c)3 Corporations

There are many types of corporations that receive this type of designation. Charities are the most common, but a few other examples include:

  • Hospitals
  • Religious organizations
  • Educational organizations
  • Anti-cruelty organizations
  • Private foundations

Nonprofit Compliance

The IRS requires that 501(c)3 designated nonprofit corporations remain nonprofit corporations. This doesn't mean your company can't make money. There are several items to keep a keen eye on when looking to get and keep 501(c)3 status.

Benefit and purpose

To receive 501(c)3 status, a corporation cannot provide a financial benefit to any individual or entity. It can, however, pay employees and keep and use profits so long as it uses the profits for the corporation's stated benefit.

When first establishing a nonprofit, you will be required to enter a stated purpose on your filing paperwork. This will be the reason for doing business, and the group of people or types of communities that your corporation will serve and provide value to without receiving compensation in return.

Political activity

Nonprofit corporations must remain politically neutral. A nonprofit corporation cannot lobby for, endorse, or give financial support to any political candidate or party. It also cannot oppose any candidate or party. Know that this rule applies to candidates of every level, from local school boards to presidents.

In addition, a nonprofit corporation may not require, urge, or otherwise attempt to persuade employees or members to support or oppose any candidate, political party, or policy. Employees and members are free to do so but their activities must be clearly separated from that of your nonprofit organization.

Annual reporting

Even though your nonprofit corporation won't have to pay taxes, the IRS will require you to report your 501(c)3 corporate income and expenses. Churches and other religious institutions are the only designated entities that aren't required to report income.

Also, although your corporation is a nonprofit, this annual reporting is required to ensure compliance with your stated purpose. If your company has made money from a source that is not related to the purpose of the nonprofit, you may owe taxes on that income. In addition, you may be subject to employment and other local taxes.

Setting up a 501(c)3 and remaining compliant with the qualifications under the IRS code can overwhelm and confuse you.

Giving back to the community is a noble endeavor. Make sure you are able to keep helping those in need by setting up your 501(c)3 correctly.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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