What Type of Nonprofit Organization Should You Form? Key Differences Between 501(c)(3)s and 501(c)(4)s

Ronnie Pawelko |

Thinking about launching your own start-up? A recent Equities.com. piece spelled out key differences between for-profits and nonprofits to consider before you take the plunge. But what about the different types of nonprofits out there? If you’re going the nonprofit route, it’s just as important to decide which structure best suits your goals. For most groups, the choice is between a 501(c)(3) and a 501(c)(4), and each has its own advantages and disadvantages – especially when it comes to raising money and getting involved in politics (yes, you should think about that).

1. Lobbying

When you’re thinking about starting a nonprofit, chances are you’re thinking about the social good you hope to achieve – not about lobbying elected officials. But many nonprofits find that somewhere down the road, they need the support of legislators to fulfill important parts of their mission. That’s where differences between 501(c)(3) and 501(c)(4) organizations come in. Both can lobby their elected representatives, but 501(c)(4)s have the advantage of being able to do unlimited lobbying. 501(c)(3)s, on the other hand, have to stay within lobbying limits.

2. Political Activities

Don’t think your nonprofit will ever wade into politics, or support or oppose candidates as part of its work? Then a 501(c)(3) is for you. 501(c)(3)s can’t support or oppose candidates for public office. However, they can engage in a wide variety of nonpartisan election-related activities such as registering voters and hosting candidate forums. 501(c)(4)s, on the other hand, can support or oppose candidates for political office and can do other things like endorsing candidates, spending money to support or oppose candidates, or targeting voters who side with them in get-out- the-vote drives. They just have to make sure that political activities are not the organization’s main purpose (and follow other applicable laws).

3. Ability to Receive Tax-Deductible Contributions

One of the biggest differences between 501(c)(3)s and 501(c)(4) s is that 501(c)(3)s can receive tax deductible contributions from donors, while 501(c)(4)s cannot. This makes it easier for 501(c)(3) organizations to raise money, as donors like the idea of reducing their tax obligations while investing in a cause they support. Many individual donors also contribute to 501(c)(4)s, but 501(c)(4)s need to work harder in their fundraising to ensure potential donors see the value in donating to an organization that can advocate for their policy positions through lobbying and electoral activities.

4. Support from Private Foundations

501(c)(3)s enjoy the benefit of having more opportunities to receive funding from private foundations than is enjoyed by 501(c)(4)s. A big reason for this advantage is because private foundations have more flexibility in awarding grants to 501(c)(3)s than they have when awarding funding to 501(c)(4) entities. While private foundations can make grants to 501(c)(4)s, private foundations need to exercise “expenditure responsibility,” and restrict grants made to c4s from being used for political or lobbying purposes.

5. Federal Grant Funds

Many nonprofit organizations receive grants from the federal government for the services and programs they provide. If an organization hopes to get federal money, and it also plans to lobby, then it should set itself up as a 501(c)(3). A 501(c)(3) that receives federal funds can lobby as long as it is using money it has raised from other sources for its lobbying work. But 501(c)(4)s that get federal grants can’t lobby at all.

State Laws May Call for Reporting and Disclosure of Nonprofit Activities

Starting a vibrant nonprofit is a dream of many socially conscious entrepreneurs. To make sure yours is the most effective it can be, it’s important to familiarize yourself with all of the applicable laws, regulations, and reporting requirements as you’re getting started. The tax code determines limits on the advocacy a nonprofit may do. At the same time many jurisdictions, on the federal, state, and local level, also require organizations to disclose their lobbying activities. Most jurisdictions want entities that raise and spend money to support political candidates to report information about their donors and their expenditures. Many states also regulate the fundraising efforts of nonprofit organizations, requiring reporting and registration in order to solicit funds in a particular state.

Ronnie Pawelko is an attorney who serves as Elections Counsel for Alliance for Justice’s Bolder Advocacy program. The program helps nonprofits navigate the rules and regulations that govern advocacy. It offers nonprofits and foundations an extensive library of free resources and tools and provides webinars, workshops, and technical assistance to help organizations understand the rules and regulations that apply to their advocacy activities. For more information, visit www.bolderadvocacy.org.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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