What Is the Difference Between a 501(c)(3) and 501(c)(4)?

By Cindy DeRuyter, J.D.

What Is the Difference Between a 501(c)(3) and 501(c)(4)?

By Cindy DeRuyter, J.D.

Many people assume that all nonprofit corporations are the same. In actuality, while there are some similarities between different types of nonprofit companies, there are also some important distinctions depending on their Internal Revenue Code classifications. For example, donations you make to one type of nonprofit are tax-deductible while you cannot deduct donations made to another. Two popular nonprofit classifications, 501(c)(3) and 501(c)(4) organizations, have key differences when it comes to their charitable purposes, allowable lobbying efforts, restrictions, and whether contributions are tax-deductible.

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Charitable vs. Social Welfare Purposes

Organizations created for charitable purposes may be exempt from income taxation under Section 501(c)(3) of the tax code. Qualified purposes include charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals.

Section 501(c)(4) is for nonprofits created for social welfare purposes. This may include local employee groups, homeowners' associations, civil leagues, and similar organizations that are designed to provide social welfare benefits but don't meet the requirements of Section 501(c)(3).

Lobbying Efforts

501(c)(3) organizations cannot legally support or oppose candidates for public office, nor can they engage in lobbying activities to help pass legislation, oppose proposed laws, or repeal existing laws, except for insubstantial lobbying activities that do not involve more than 10 percent of the organization's operating budget.

In contrast, 501(c)(4) companies can endorse or campaign against candidates and can lobby lawmakers, as long as the causes the organization is lobbying for coincide with the nonprofit's social welfare purposes. Organizations that choose to engage in political lobbying may need to provide disclosures to members showing how much of their dues were used for such activities.

Tax-Deductibility of Contributions

Neither 501(c)(3) nor 501(c)(4) organizations pay income on revenues generated. There are important differences related to the tax-deductibility of contributions made to the two different types of organizations, however.

When you make a charitable contribution to a qualified 501(c)(3) organization, you can generally take an income tax deduction. In contrast, you cannot deduct contributions made to a 501(c)(4) nonprofit organization, with certain limited exceptions.

Restrictions Applicable to Both 501(c)(3) and 501(c)(4) Organizations

Nonprofit companies that qualify as 501(c)(3) charitable organizations cannot use earnings for the benefit of their officers, directors, or employees, except for paying reasonable compensation for services. Similarly, 501(c)(4) companies cannot use earnings for the benefit of the company's shareholders or members.

Creating Nonprofit Organizations

To form a nonprofit organization as either a 501(c)(3) or a 501(c)(4) company, you need to form a corporate business entity under your state's laws. Your articles of incorporation must identify that the company is a nonprofit.

The next step is applying for 501(c)(3) or 501(c)(4) status with the Internal Revenue Service. You can work with a business law attorney licensed in your state or use a reputable online legal services provider to establish your nonprofit and apply for tax exemption. Talk to a tax professional if you have questions about nonprofit taxation or tax-deductibility of contributions.

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.