Forming a nonprofit organization requires more than just a passion to solve complex problems. Drawing up organization bylaws, developing a mission statement, and strategically assembling a Board of Directors are just some of the crucial steps in founding a new nonprofit.
But above all else, one of the most critical actions to take when establishing a new nonprofit organization is to file for tax-exempt status.
This begs the question — should your organization file as a 501(c)(3) nonprofit or a 501(c)(4)? What exactly is the difference between a 501(c)(3) and a 501(c)(4)?
Choosing to file either requires strategic planning and thought around the intended goals of the organization.
This guide will lead you through the basic definitions and familiarize you with the key differences as well as similarities between 501(c)(3)s and 501(c)(4)s, so you are well-positioned to move forward with a tax-exempt designation most appropriate to you.
Let’s dive in!
What is a 501(c)(3)?
According to the Internal Revenue Service (IRS), tax-exempt organizations described under section 501(c)(3) are typically referred to as “charitable organizations”. They are established exclusively for religious, scientific, charitable, literary or educational purposes, in addition to testing for public safety, amateur sports competitions, and prevention of cruelty to children or animals.
Many 501(c)(3) entities provide direct services to communities they serve and are often referred to as public charities. Additionally, private foundations also receive 501(c)(3) designation.
Churches, animal welfare agencies, food banks, after-school programs, universities, and homeless shelters are common types of 501(c)(3) institutions.
Organizations that file as 501(c)(3)s must complete a form 990 every year to disclose their financial activity. Some 501(c)(3)s, like schools and churches, may be required to complete additional filing requirements.
501(c)(3) organizations are eligible to receive tax-deductible contributions.
What is a 501(c)(4)?
Tax-exempt organizations that receive their exempt status under section 501(c)(4) are known as social welfare organizations.
Social welfare organizations are entities exclusively for the promotion of the general welfare of people and can be direct participants in public policy processes and politics through lobbying activities.
Under this tax-exempt designation, organizations are allowed to influence legislation and involve themselves in political campaigns and elections.
Charitable contributions made to 501(c)(4) entities, however, are not tax-deductible.
Organizations that qualify for 501(c)(4) status and are involved in direct or “grassroots” advocacy and lobbying are known as “action organizations”. Action organizations serve their primary objective by defeating or advocating for the proposed legislation or abolishing the existing one.
Examples of 501(c)(4) organizations are Planned Parenthood, AARP, March for our Lives Action Fund, Kiwanis, Rotary, Lions Clubs, and volunteer fire departments.
Differences Between a 501(c)(3) and a 501(c)(4)
Now that we have the basic definitions down, let’s take a closer look at the difference between a 501(c)(3) and a 501(c)(4).
The distinction between “social welfare” and “charitable” organizations, in fact, appears negligible — they both exist to benefit public welfare and address their immediate needs.
However, depending on whether an organization is registered as a 501(c)(3) or 501(c)(4) significantly impacts the way it can engage with politics and policy-making.
Lobbying: Political Activities of 501(c)(4) Organizations
One of the key differences between 501(c)(3) and 501(c)(4) organizations is the amount of lobbying and direct political activity they can engage in. As previously mentioned, 501(c)(4) organizations are not bound by limitations in regards to political campaigning or lobbying. An organization like the American Civil Liberties Union (ACLU) can work with legislators to directly influence policy and work to ensure proposed legislation that aligns with the organization’s mission and vision is successful.
Their tax-exempt status will not be threatened by encouraging the public to vote for a candidate that supports its mission and vision.
Following the 2010 landmark decision by the Supreme Court, Citizens United v. FEC, the number of politically active nonprofits increased significantly.
According to it, labor unions and corporations are now allowed to file for 501(c)(4) status and spend unlimited income with undisclosed donors via political actions committees, or PACs, to directly support political candidates and campaigns.
Despite 501(c)(4)s’ ability to influence policy, donations to 501(c)(4)s are not tax-deductible.
Advocacy and Education: Limitations on Politics and the Policy Process for 501(c)(3)s
On the other hand, 501(c)(3) organizations are required to follow very specific guidelines related to political involvement and advocacy.
If a nonprofit 501(c)(3) provides direct support to immigrants and refugees and a politician is proposing a legislative agenda that restricts immigrant rights, the 501(c)(3) is severely limited in how to address or condemn the politician’s actions.
As stated by the IRS, 501(c)(3)s cannot endorse specific candidates or urge the public to contact members or employees of any legislative body for the purpose of proposing, supporting, or opposing legislation, nor can they make personal critiques of these individuals.
However, that doesn’t mean that a 501(c)(3) must remain absolutely neutral when it comes to public policy. Organizations with a 501(c)(3) designation are allowed to educate the public about a certain policy or voice its misalignment with their mission by distributing educational materials, conducting research-based activities, or hosting educational meetings and non-partisan debates.
Similarities between 501(c)(3) and 501(c)(4)
While there are stark differences between 501(c)(3) and 501(c)(4) organizations related to their influence over the public policy process, they remain quite similar in general purpose.
Both exist to benefit the public and solve critical issues impacting people. Both 501(c)(3) and 501(c)(4) entities are exempt from federal income taxes on dollars earned or fundraised for their mission.
The type of tax-exempt registration simply imposes a legal restriction on the ways in which an organization can create impact and change. But advocacy is still at the heart of both types of nonprofit entities.
Both types of organizations can conduct general get-out-the-vote and voter registration activities, voter protection programming and activities, and can distribute voter guides that broadly illustrate candidates’ views.
501(c)3 and 501(c)(4) Affiliations
Some 501(c)(3) entities are able to engage in more explicit political activities and lobbying by forming an affiliated 501(c)(4).
These affiliation relationships allow organizations to influence politics while continuing to leverage the benefit of tax-exempt donations to 501(c)(3)s to attract private donors for their charitable programs.
For example, the AARP Foundation is the AARP’s affiliated charity organization. With memberships of over 38 million and $1.5+ billion in revenue, the AARP is one of the United States' most influential lobbying organizations or 501(c)(4) groups.
While the AARP itself lobbies for legislation benefiting adults aged 50 and over, the AARP Foundation, on the other hand, provides direct support to this population including educational programs and legal services.
This affiliation allows the AARP to provide direct support to the population they serve while simultaneously lobbying for policy change to improve the lives of older adults on a grander scale.
Wrapping Up: What is The Difference Between 501(c)(3) And 501(c)(4)?
Choosing the correct tax-exempt designation to file for when establishing a new nonprofit ultimately boils down to the organization's overall goal and planned activities.
It is important to be strategic and thoughtful prior to filing for tax-exempt status and strongly establish the organization’s purpose.
Will your organization engage primarily in direct service programming and education? Or create broad systems to change and influence legislation through lobbying and political action?
Ask yourself these key questions to understand which of these two designations aligns best with the nonprofit organization’s ultimate objectives.
Now that you understand the difference between 501(c)(3) and 501(c)(4) entities, you will be well-positioned to choose the best designation for your new nonprofit.
If you're looking for more informational articles about nonprofits, be sure to check out our post on what is a budget narrative next.