How Hard Is It to Get 501c3 Status?

How hard is it to get 501c3 status is a question many business owners ask when deciding to start a nonprofit.3 min read

How hard is it to get 501c3 status is a question many business owners ask when deciding to start a nonprofit. By its simplest definition, a nonprofit organization is a business does not function to make a profit. This does not mean that a nonprofit can never make a profit.

A nonprofit organization can produce goods or provide services to make money and can even invest that money into the stock market in an effort to make more money. The difference is that the profits must go back into the company. There can be no profit-sharing among members and, in general, these organizations have no owners.

This is the reason that a nonprofit is also referred to as a not-for-profit company as their reason for being is not to make money but they earn the money they can to keep their organization running.

It is up to each state who they will grant nonprofit status to, not the federal government. This can be done in different ways but once given by the state the federal government can recognize it. For your company to achieve tax-exempt status, it will need to be recognized by the federal government as a nonprofit.

Types of Nonprofit Organizations

There are three primary types of nonprofit organizations that will be recognized by the federal government. These types include:

  • Corporations
  • Unincorporated organizations
  • Trusts

Forming as a corporation is often the most popular choice for community organizations though they must be incorporated under state laws. To incorporate the company must:

Most community groups choose incorporations because it helps them establish validity with the public. The public is familiar with corporations and often sees them as dependable. A corporation also provides those involved the benefit of limited liability. What this means is if the organization was to be sued, members' personal assets would be protected. It is important to note that liability will vary from state to state so you should consult with an attorney to fully understand your state laws.

An unincorporated organization will be similar to a corporation, having a similar purpose and bylaws. Instead of Articles of Incorporation, they will have a constitution or policies and there is no protection against liability but a lot less state reporting.

Trusts will have more narrowed interests than either a corporation or unincorporated group. Trusts are usually charitable trusts and therefore not typically appropriate for a community group.

Federal Tax Exempt Status

Nonprofit organizations may seek tax-exempt status under the United States Tax Code. The best-known tax exemption is 501(c) (3) which is also referred to as a charitable tax exemption. When this designation is granted, the organization will be exempted from both federal corporate and income taxes for most of their revenue. It will also allow the organization to solicit tax-deductible contributions. The tax exemption can be the most appropriate for community organizations.

There is a total of 26 different types of exemptions that are written under the tax code and can be used for different purposes. There may be cases where a community organization finds that more appropriate. If the organization was involved in lobbying or major political advocacy, it would not be allowed to apply for 501(c) (3) tax exemption.

For example, a group whose focus was on social welfare and they were actively lobbying political candidates who supported their reforms could find that the 501(c) (4) tax exemption may be more appropriate because it is used specifically for social welfare organizations.

Before deciding on which type of tax-exemption to pursue, it is beneficial to sit down with legal counsel or a tax expert. You can use their expertise to help determine which tax exemption will be the best for your nonprofit organization.

Automatic Recognition

There are some organizations that will receive automatic recognition as having 501(c) (3) tax-exempt status and will not even need to file for it. These types of organizations include:

  • Subordinate organizations that are governed by a parent group.
  • Churches or church associations.
  • Non-private foundations that have gross receipts totaling less than $5,000.

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