501(c)(3) or 501(c)(6) – What’s the difference?
Thinking of starting a new, nonprofit, tax-exempt organization? Trying to decide whether to organize as a c3 or c6? Know the difference? Whereas the c3 and c6 are alike in terms of exemption from income taxes, their qualifying characteristics, the application process (IRS Form 1023 vs. 1024), and the various rules governing their ongoing activities can be quite different.
It is helpful to first understand the distinction between a “nonprofit” and a “tax-exempt” entity. “Nonprofit” refers to an entity’s incorporation/organizational status as governed by state law, whereas “tax-exempt” refers to federal income tax exemption governed by the Internal Revenue Code. The c3 and c6 are two common IRS tax-exempt statuses for nonprofits.
To qualify for either exempt status, a nonprofit must meet specific tests which are outlined in IRS Publication 557, Chapters 3 and 4, available at www.IRS.gov. One common requirement of a tax-exempt entity is that your net earnings may not benefit private shareholders or individuals. Once organized, c3 and c6 organizations are both required to file annual IRS Form 990, 990-EZ, or 990-N depending on their size. They may also be required to file 990-T and pay taxes if they have “unrelated business income.” While the applicable IRS schedules and required disclosures of the c3 and c6 vary, all tax exempt entities are expected to have strong governance policies and practices in place and the new 990 wants to know a great deal about them.
Which exempt classification is right for you? Here are some common differences:
|Operated exclusively for charitable, educational, religious, literary, or scientific purposes||Operated to promote a common business interest, and to improve business conditions in the industry|
|Includes membership associations (e.g., professional society), if the purpose is to advance the profession with respect to “educational” activities||A membership organization (e.g., business league, industry trade association), advancing a common business interest|
|Lobbying and political activities are significantly restricted. A c3 will lose tax-exempt status if the IRS determines that it has engaged in “substantial” lobbying activities||Allowed a wide-range of lobbying. Yet, the main stipulation is that a c6 is required to disclose to membership the % of their annual dues that is lobbying (i.e., non-deductible to members for tax purposes)|
|Special Advantages of the c3 include:|
|Enhanced fundraising advantages, such as eligibility to receive tax-deductible “charitable contributions” and gifts of property and eligibility to receive many grants||Dues or other payments to a c6 are only deductible to the extent that they serve an “ordinary and necessary” business purpose of the payer|
|Eligibility to receive other state and local tax exemptions (e.g., sales tax)|
As you can see, there are several similarities and distinct differences within the world of the 501(c); and c3/c6 represents only two of several types. When creating a new nonprofit organization, it is always wise to consult legal, tax, and association management professionals with the background and experience to help you make an informed decision and to protect your ongoing tax-exempt status.
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Scott Dick is a former AMR Team Member
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