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501(c)(3)s support charitable causes while enjoying tax benefits

On Behalf of | Mar 6, 2023 | Business Law

Business owners with a strong passion for a charitable cause such as cancer research or human rights might want to establish a non-profit corporation to raise funds and promote education for the cause they so much believe in.

This act of benevolence is recognized as something that we as a nation should support, and thus non-profit corporations and other nonprofit organizations are granted special tax treatment under federal law, as long as they meet certain requirements.

What is a 501(c)(3) organization?

To obtain special tax treatment under federal law, the organization must be formed as a 501(c)(3) organization. 501(c)(3) organizations must be a corporation, trust or association. They must be run solely for nonprofit purposes. No profits can go to private shareholders or individual.

Per IRS regulations, a 501(c)(3) cannot have a political purpose. It cannot base a substantial amount of its activities on lobbying or otherwise influencing legislation. It cannot participate in political campaign fundraisers or in any other campaigning for or against a specific political candidate.

How is a 501(c)(3) formed?

501(c)(3) organizations must be corporations, trusts or associations. The process of forming a 501(c)(3) includes but is not limited to:

  • Executing a purpose statement and bylaws
  • Naming your nonprofit
  • Selecting a board of directors
  • Filing articles of incorporation, articles of association or a trust agreement with the state
  • Obtaining an employer identification number (EIN)
  • Applying for status as a 501(c)(3) with the Internal Revenue Service (IRS)

There are additional requirements for qualifying as a 501(c)(3) during the formation process not listed here.

Benefits of structuring your organization as a 501(c)(3)

Once you complete the necessary steps to qualify as a corporation and obtain 501(c)(3) status, your organization is recognized as exempt from federal taxation. This means the organization can legally seek donations for its cause and will be exempt from federal taxation.

The board members of a 501(c)(3) corporation enjoy protection from personal liability for the actions of the organization, just like board members in any corporation. Also, nonprofit corporations with 501(c)(3) status can apply for certain state and federal grants.

Donors to a 501(c)(3) can deduct their donations from their personal income taxes. Moreover, they may gain personal satisfaction from donating to a valid organization that they believe is worth supporting.

While forming a 501(c)(3) can be complex and time-consuming, it can also be a passion project that brings personal satisfaction and benefits a worthy cause. This alone makes it worth considering structuring your organization as a 501(c)(3).