Are you thinking of starting a nonprofit? A nonprofit is an umbrella term for different tax-exempt organizations classified by the Internal Revenue Service (IRS) based on their purpose and activities.
Two stand-out categories that constitute the majority of nonprofits are Section 501(c)(3) and 501(c)(4) of the Internal Revenue Code. Both nonprofit types have unique restrictions, pros, and cons suitable for different nonprofit causes.
We have compared 501(c)(3) vs 501(c)(4) in detail to help you apply for the most appropriate status.
What is a 501(c)(3) Nonprofit?
A 501(c)(3) status by the IRS offers tax-exemption benefits to nonprofit organizations. 501(c)(3) organizations are eligible to receive tax-deductible donations from individual and corporate donors.
Although exempt from federal taxes, 501(c)(3) organizations must pay employee income taxes and social security payments.
To qualify under section 501(c)(3), an organization must be involved in IRS-approved activities, which include:
- Relief for the poor, distressed, and underprivileged, such as providing food, shelter, or financial assistance to those in need.
- Advancement of education, science, and religion, such as operating schools, conducting research, or providing religious instruction and services.
- Advocacy against animal cruelty, such as promoting animal welfare and preventing abuse or mistreatment of animals.
- Preventing juvenile neglect and abuse, such as providing counseling, shelter, or support services for at-risk youth.
- Protecting civil and human rights, such as advocating for equal rights, non-discrimination, and social justice initiatives.
- Reducing neighborhood tensions and promoting community development through housing initiatives, youth programs, and conflict resolution efforts.
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What is a 501(c)(4) Nonprofit?
A 501(c)(4) entity is also a tax-exempt nonprofit organization, but it is different from 501(c)(3) in terms of eligibility requirements and limitations. Although 501(c)(4) nonprofits are tax-exempt, donations to these organizations are not tax-deductible.
501(c)(4) nonprofits are largely involved in promoting social welfare for the general public, including political advocacy and lobbying.
To qualify for 501(c)(4) status, an organization must fulfill the following requirements:
- It must operate exclusively to advance social welfare initiatives.
- It must operate on a nonprofit model, with all the earnings dedicated to its social welfare purpose.
- It must engage in non-commercial activities that are not charitable.
Social welfare organizations, trade unions, and civic leagues fall under the 501(c)(4) category. Here are some well-known examples of 501(c)(4) nonprofits:
501(c)(3) vs. 501(c)(4): How Do They Differ?
While both are tax-exempt nonprofits, the difference between 501(c)(3) and 501(c)(4) is stark. 501(c)(3) organizations, which include public charities, must attract support from a wide range of donors. 501(c)(4) organizations can be fully supported by a single entity.
Here are the other key distinctions you must understand before choosing the right foundation for your nonprofit.
Purpose
A 501(c)(3) organization must operate exclusively for one or more of the exempt purposes dictated by the IRS. They offer direct services to their target community, such as:
- Food donations
- Free health services
- After-school programs
A 501(c)(4) nonprofit must operate primarily to bring about social reforms and civic betterment.
501(c)(3) nonprofits are restricted from engaging in more than one activity that does not further their exempt purpose. On the contrary, a 501(c)(4) nonprofit can participate in activities beyond its limitations if they are meant for the good of the public.
Registration
To register as a 501(c)(3) nonprofit organization, you must submit Form 1023 with the IRS. When applying for 501(c)(4) tax-exempt status, you must file Form 1024-A.
You must first register and incorporate your nonprofit at the state level. The process of starting a nonprofit may vary with each state.
Here are some quick guides to help you:
- How to Start a Nonprofit in NY
- How to Start a Nonprofit in Indiana
- How to Start a Nonprofit in Illinois
- How to Start a Nonprofit in Georgia
- How to Start a Nonprofit in Arizona
Eligibility for Tax-Exemption
While both 501(c)(3) and 501(c)(4) nonprofits are exempted from paying federal income taxes, their tax obligations differ.
As a 501(c)(3) organization, you are not obligated to pay most state and local taxes. For a 501(c)(4) nonprofit, some taxes are applicable depending on the state the organization is based in.
Fundraising and Tax Deductibility
Tax deductibility in donations is a major distinguishing factor between 501(c)(3) and 501(c)(4) nonprofits.
Tax deductible contributions are a significant fundraising benefit nonprofits can offer to their donors to boost retention. Donations to 501(c)(3) organizations qualify for tax relief, while 501(c)(4) organizations do not get that advantage.
Limitations exist for contributions like donations offered to volunteer fire companies and war veterans organizations.
Other 501(c)(4) nonprofits must be transparent about their non-tax-deductible donation status in all fundraising efforts. The information should also mention that some donations may be deductible as business expenses if and when applicable.
Lobbying and Advocacy
501(c)(3) organizations:
- Cannot participate or intervene in political campaigns for or against candidates for public office.
- Can engage in some lobbying activities, but it cannot be a substantial part of their activities.
- Cannot support/oppose legislation beyond insubstantial levels without being subject to taxation.
501(c)(4) organizations:
- Cannot have political campaign activity as their primary purpose.
- Are strictly prohibited from directly or indirectly participating in political campaigns.
- Can engage in lobbying related to their purpose.
- Can support legislation related to their cause.
- Appeal to representatives and other governing bodies.
- Voice their opinions of elected officials.
Note that a 501(c)(3) organization must file Form 5768 before taking part in any lobbying efforts.
Political Campaign Intervention
501(c)(4) nonprofits have more flexibility and fewer restrictions when it comes to advocating for their causes and engaging in political activities compared to 501(c)(3) organizations. This flexibility allows 501(c)(4) organizations to influence public policy effectively.
Some of the activities 501(c)(4) nonprofits are permitted to engage in include:
- Pay for costs essential to a political organization.
- Compare their missions with the candidate’s mission.
- Ask candidates to sign pledges on an issue.
- Endorse candidates whose views align with theirs.
- Support their preferred candidate’s mission and conduct political lobbying.
- Conduct voter registration activities.
Unlike 501(c)(4), 501(c)(3) nonprofits cannot support or oppose political candidates. Their lobbying activities must be within admissible limitations.
The exact percentage may vary with the 501(c)(3) nonprofit’s size.
A 501(c)(3) nonprofit can sponsor debates between all candidates to highlight their views and opinions, but it cannot endorse a particular candidate.
Disclosure Requirements
The law requires 501(c)(3) nonprofit organizations to maintain complete transparency. They must disclose certain crucial information to the public, which includes the nonprofit’s:
- Annual Form 990 details
- Financial statements
- List of donors
The information is provided to the public on the IRS official website and other credible online databases.
501(c)(4) nonprofit organizations are not bound to disclose donors. Their donors are protected from public scrutiny, which may motivate more charitable contributions to their organization.
Grounds for Revocation
The IRS can revoke a 501(c)(3) organization’s tax-exempt status on the following grounds:
- Excessive lobbying, which goes beyond a nonprofit’s purpose or influencing legislation to help a partisan side, is not allowed.
- Participation in any political activity, apart from civic and voter education.
- Exploitation of the organization's funds or diverting them for the private benefit of the nonprofit’s members. The proceeds from all the fundraising activities must be used to advance the nonprofit’s cause.
- Failure to submit annual reports to the IRS.
501(c)(4) social welfare organizations can lose their tax-exempt status only when:
- They do not submit annual returns. Three consecutive violations will result in direct revocation.
- They engage in activities that contradict their stated tax-exempt purpose.
- They engage in unrelated business activities beyond their scope of objectives and fail to report this to the IRS.
501(c)(3) vs. 501(c)(4): Which One Should You Choose?
When deciding which type of nonprofit to establish, you must consider the key differences. Here is a short table summarizing the pros and cons of 501(c)(3) vs 501(c)(4):
Nonprofit Purpose
Note down your mission statement. If your nonprofit’s primary purpose is charitable, religious, educational, scientific, or literary, then a 501(c)(3) status will be the best choice. Register as a 501(c)(4) organization if your focus is social welfare through lobbying and political advocacy.
Tax-Exemption Requirement
Do you want to incentivize your donors with tax-deductible contributions? You will have this advantage with a 501(c)(3) status. Choose 501(c)(4) only if your donors can claim the contributions as business expenses.
Mission Advancement Activities
If your organization needs to participate in political campaigns and favor a candidate, 501(c)(3) nonprofit status is not for you. 501(c)(4) organizations have the advantage of unlimited lobbying activities and political advocacy.
Pro tip: For both 501(c)(3) and 501(c)(4) tax-exempt status, you must apply within 27 months of starting as a nonprofit.
Bottom Line on 501c3 vs 501c4
Consider your nonprofit’s ultimate goal and research extensively to decide which filing is best for you.
Understand the difference between 501(c)(3) and 501(c)(4) before setting up your nonprofit. With different eligibility requirements, tax benefits, and limitations, choosing the right one is essential to achieving your mission.
If your goal is to promote social welfare and support specific candidates with similar views, register as a 501(c)(4). Go with 501(c)(3) if political activities are not part of your initiatives.
Regardless of whether you choose to establish a 501(c)(3) or 501(c)(4) nonprofit, having a reliable fundraising strategy and the right tools is crucial for your organization's success. Zeffy offers a 100% free fundraising platform to help you maximize your fundraising efforts and achieve your mission more effectively.
With Zeffy, you can easily create online donation campaigns, plan and manage fundraising events, and track your donors – all from a single, user-friendly platform.
FAQs - 501c3 vs 501c4
Can a 501(c)(4) make a profit?
To operate as tax-exempt social welfare organizations, as the Internal Revenue Code section 501(c)(4) dictates, organizations must not work for profit. Their primary purpose should be to promote social welfare.
What are the limitations of 501(c)(4)?
501(c)(4) organizations are allowed to participate in political lobbying only if it is meant for the general welfare. They cannot focus primarily on candidate elections in federal, state, or local offices.
What is the primary purpose of the 501(c)(4)?
501(c)(4) organizations are meant to focus primarily on:
- Advancing social welfare initiatives.
- Educating people on certain issues.
- Endorsing candidates who have a similar initiative to the nonprofit’s mission.
Can a 501(c)(3) partner with a 501(c)(4)?
Yes, 501(c)(3) and 501(c)(4) nonprofits can be operated by the same group of people, but both organizations should be incorporated separately with distinct EINs. Both organizations can also share office space, equipment, and employees but work for their unique initiatives.
A 501(c)(3) organization can give grants to 501(c)(4), but it should not be used for lobbying.
