Differentiating Between The Types of Nonprofit Organizations

501(c)(3)
According to the IRS, a 501(c)(3) is an organization that primarily operates in one of these categories:

• Religious
• Charitable
• Literary
• Scientific
• Educational
• Public safety testing
• Fosters of amateur sport bouts
• Prevention of children cruelty
• Prevention of animal cruelty

What truly defines a 501(c)(3) organization is its mission. It has a dedicated goal that the members want to accomplish. It could be to provide homes for stray animals or to raise funds for cancer research. 501(c)(3) organizations are initially organized as a corporation, and then the entity applies for 501(c)(3) status through the IRS. Any contributions a donor makes to a 501(c)(3) organization are tax exempt.

The main advantage of a (c)(3) is tax exemption. While they’re still responsible for payroll taxes if they have employees (another reason why volunteers are preferred), tax exemption frees them from paying federal, state, and local income and sales taxes. It also provides some protection against lawsuits and the ability to receive grants from governments and private foundations.

501(c)(4)
501(c)(4) organizations are similar to 501(c)(3), but instead of a mission, these groups are associations joined by a similar function. A 501(c)(4) organization is referred to as a social welfare organization such as a rotary club, homeowner association, or a volunteer fire station.

Although contributions to a 501(c)(4) are not tax-deductible, these kinds of groups can engage in political and lobbying activity.

What’s the Difference Between a 501(c)(3) and 501(c)(4)?
The main differences between a (c)(3) and a (c)(4) organization are the level of political activity in which each organization can engage and whether donations are tax-deductible.

In a 501(c)(3), political activity is very restricted and cannot favor one party over another. Any political activity must relate to the purpose of the organization, and it can’t comprise more than 20 percent of the organization’s budget, which means that these organizations don’t normally participate in any political activity unless it directly relates to furthering their mission.

With a 501(c)(4), political activity and lobbying are much less restricted. They can campaign and support specific candidates who further the goals of their organization as long as they don’t give money directly to that candidate. They can spend up to 50 percent of their budget on lobbying and other political activities.

The other difference is in the ability to deduct donor contributions from taxes. Those who donate money to a 501(c)(3) can deduct their contributions on their taxes. Donations to a 501(c)(4) are not tax-deductible, although a business may be able to write the deductions off as a business expense.