Every nonprofit entrepreneur has a dream of bettering their community. But as you’re preparing your federal and state incorporation paperwork to file for nonprofit status, the question will arise: What’s the difference between 501(c)(3) and 501(c)(4), and which designation should I choose?
Comparing 501(c)(3) vs. 501(c)(4) is something you need to give serious consideration to by looking over the business plans you’ve created for your nonprofit startup. While certain features of these two tax designations are alike, there are critical differences between the 501(c)(3) and 501(c)(4) that you need to understand before applying.
501(c)(3) vs. 501(c)(4): Understanding each classification
A 501(c)(3) is considered a “charitable” tax-exempt organization. Nonprofits in this classification are very limited to the kinds of political activity or advocacy work they can undertake. Donations to organizations in this category are tax-deductible and typically include churches, medical or scientific research groups, mental and physical health support groups, education programs, and more.
A 501(c)(4) is generally referred to as a “social welfare group.” With this designation, the organization can endorse political candidates in addition to conducting advocacy and outreach – this is one key difference between the 501(c)(3) and 501(c)(4). The other is that while these organizations are exempt from taxes, charitable donations to them are not considered tax-deductible.
501(c)(3) vs. 501(c)(4): Understanding Charitable and Social Welfare Classifications
501(c)(3)s are considered charitable organizations because they are education- and advocacy-based. These nonprofits can engage in public outreach about their causes and may educate the public in areas relevant to their mission. In addition, organizations in this designation can endorse legal measures that come up for a public vote as long as the proposition is aligned with the nonprofit’s mission.
As a social welfare organization, 501(c)(4)s can be politically involved and partisan in their outreach and communications. For example, these organizations may endorse political candidates, lobby for legislative changes, and advocate for legal measures.
501(c)(3) vs. 501(c)(4): Understanding Lobbying and Donation Restrictions
With 501(c)(3) organizations, coordinating nonpartisan lobbying activities is allowed. For example, everyday activities could include voter registration drives, activities to help ensure voter access, and vote education events. However, when it comes to donations, 501(c)(3)s need to disclose to the IRS fundraising, corporate sponsorships, and donor information about charitable gifts worth $5,000 or more.
With 501(c)(4) organizations, lobbying for legislation and communicating specific recommendations for ballot measures are fully allowed. The main difference between the 501(c)(3) and 501(c)(4) is that the 501(c)(4)s have much more flexibility to advance the issues supported by their mission. In addition, while filing form 990 returns, 501(c)(4) nonprofits are exempt from disclosing any information about donations and their donors.
Real-World Examples of 501(c)(3) vs. 501(c)(4):
An example of a 501(c)(3) organization would be the Cystic Fibrosis Foundation, which raises funds to conduct research to eliminate this rare childhood disease. The organization endorses state propositions that advance areas related to its mission, such as stem cell research, but does not endorse specific political candidates.
An example of a 501(c)(4) would be the Ocean Champions environmental organization and political action committee. This organization actively works to elect Members of Congress who support their mission of reducing environmental impacts on the world’s oceans.
Instead of Choosing One, You Can Have Both!
Depending on the focus of your nonprofit, it is possible to create both a primary 501(c)(3) organization that provides mission-focused direct services along with a separate 501(c)(4) organization that advances its mission through political and legislative arenas.
Choose What’s Best for You
After reviewing the advantages and disadvantages of 501(c)(3) vs. 501(c)(4), take time to think about what designation will work best for the strategic plans you’ve created for your nonprofit. Regardless of the designation you select, you’ll still be making a significant contribution to your community and working to create change!
Need Help Understanding the Difference Between 501(c)(3) and 501(c)(4)? We Can Help!
We provide educational resources to organizations of all sizes and sectors. Get in touch to learn more about partnering with BryteBridge Nonprofit Solutions to ensure your nonprofit startup selects the best nonprofit designation for its mission.