The Complete Guide to Registering a 501c3 Nonprofit
The section 501(c)(3) constitutes the section that is part of the US Internal Revenue Code that permits exemption from federal taxation for nonprofit organisations, particularly those classified as private foundations, public charities and private foundations operating for profit. It is administered and regulated through the US Department of Treasury through the Internal Revenue Service.
To be able to be considered tax-exempt, 501(c)(3) is the nonprofit must be established for at least one of the following exclusively charitable goals:
- Evaluation for Public Safety
- Promotion of international or national amateur sports, as well as
- Prevention of cruelty towards animals and children
The types of 501(c)(3) Organizations
501(c)(3) Organizations are classified into three categories that include private foundations and private operating foundations.
Public charity: These are what people think of as organisations that are active in their programs. Examples include benevolence and church organizations as well as animal welfare organizations and educational institutions, among others. They usually get a large part of their revenue either from people in general or the government.
Donations to public charities may be tax-deductible up to 60 percent of the individual donor’s income. Corporate limits generally are 10 percent. Additionally, public charities have to maintain a governing body mostly composed of non-related, independent individuals.
Private foundations are generally classified as non-profit organizations that help public charities by providing grants, however that’s not the norm. Private foundations’ donations can be tax-deductible to the donor’s individual up to 30 percent of the amount of income. The management for a foundation that is private may be more tightly controlled as opposed to the case of a public charity. Family foundations are an instance of private foundations.
Private foundation operating: The third grouping is the most infrequent Private operating foundation. These foundations typically run programs similar to those of public foundations, but they can also possess features (such such as close management) like a foundation. Therefore private foundations operating as non-profit organizations are typically referred to as hybrids. The majority of the profits are used to fund the execution of the programs. Donation deductibility is comparable to the tax deduction for a public charity.
Criteria for 501C3 Organization
A 501(c)(3) organization in the US is a type of nonprofit organization exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code, providing that certain criteria and purposes are fulfilled to qualify as tax-exempt status. To become one, an organization must meet specific requirements and fulfill specific purposes to qualify as a 501(c)(3).
Here are the main criteria of a 501(c)(3) organization:
The primary mission of any 501(c)(3) must be charitable, religious, educational, scientific or literary with regards to animals or children as its purpose and must benefit the general public in some way.
For an organization to qualify as non-profit status, its activities must exclusively serve exempt purposes, which means no private individuals or shareholders should benefit directly. Any earnings or profits generated from the operation of such an entity should only ever be used towards fulfilling those exempt purposes.
As with other nonprofits, 501(c)(3) organizations are prohibited from engaging in certain political activities, such as endorsing or opposing political candidates or running campaigns for or against candidates for public office. Likewise, their lobbying activity may also be limited.
All organizations must include in their organizing documents a dissolution clause which ensures that should the organization disband, its assets are distributed for an exempt purpose or donated to another 501(c)(3) nonprofit.
No Private Inurement:
An organization’s income and assets cannot unduly benefit any private individual shareholders; rather, its operations must serve to benefit society as a whole.
In order to gain official 501(c)(3) tax-exempt status, organizations must file Form 1023 or 1023-EZ with the Internal Revenue Service and receive approval.
Important to keep in mind is that these requirements provide only an outline, as there may be additional guidelines and regulations specific to certain activities or types of organizations. Therefore, legal and tax professionals are strongly recommended when creating or running a 501(c)(3) nonprofit.