There are a wide variety of types of nonprofit organizations or, as the Internal Revenue Service (IRS) refers to them, 501(c) entities.
With so many types of 501 nonprofits, it can be difficult to understand their classifications and the differences between them—but we’re here to help.
In this article. we will guide you through the basics of 501(c) nonprofits, the benefits or potential barriers to receiving 501(c) status, and how to make an informed decision on the best 501(c) designation to pursue for your own nonprofit organization.
Let’s get started!
Understanding Nonprofit Classifications: What Is a 501(c)?
For any nonprofit entity, receiving a 501(c) designation is vital.
501(c) status confers federal tax-exemption on an organization by the IRS, providing relief to institutions that are designed to benefit society and exist to provide programming and services for the public good.
Commonly, this type of federal tax exemption is granted to organizations such as charities, philanthropic entities (e.g. foundations), religious organizations, and policy and advocacy organizations. However, according to the IRS, social welfare organizations, civic leagues, labor organizations, and business leagues can also qualify as exempt 501(c) organizations.
Essentially, a 501(c) status is the official designation of any tax-exempt organization.
Many people assume that all nonprofits are designated as 501(c)3 entities; however that is not the case. There are a over 29 501(c) designations, including:
Charitable organizations: 501(c)3
Labor unions: 501(c)5
Employee funded pension trusts: 501(c)18
Mutual reserve funds 501(c)14
And many more.
We will go over some of the most common 501(c) designations in greater detail further along in the article.
Importance of Understanding the Different Types of 501c Nonprofits
For any nonprofit professional, understanding these different types of 501(c) designations and which one is relevant to your own organization is essential.
Depending on the type of tax exempt status that a nonprofit is granted, it can receive additional tax breaks, benefits, or can be subjected to specific rules and regulations that do not govern every single type of nonprofit.
For example, under specific 501(c) designations, not only can an organization be exempt from paying federal tax, but supporters of the organization might also receive a tax rebate on donations made to the organization.
Additionally, some types of 501 nonprofits have rules against political lobbying that don’t apply to others.
Understanding the types of 501(c) classifications is also necessary when starting a nonprofit organization and applying for a tax-exempt status.
Securing a 501(c) status will not only grant you federal tax exemption, but it opens the door to other types of benefits and systems that are necessary for your organization to operate effectively and efficiently.
For instance, most nonprofit organizations rely on charitable grants from foundations or from the government. For many grant opportunities, organizations are required to have a 501(c)3 designation to apply.
Not only does a 501(c) designation give nonprofits the ability to access revenue essential to the longevity of their operations, it also boosts credibility with the public. Knowing that an organization has received special classification from the IRS can give supporters peace of mind, knowing that they are helping an organization that is truly devoted to their mission and benefiting the public in some way.
The appropriate 501(c) status will also provide a foundation for the organization’s internal policies and governance—with the IRS tax code guiding much of the nonprofit’s norms and activities. Having a strong understanding of what a 501(c) classification is and its importance will ensure your nonprofit organization is positioned for long-term success and sustainability.
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By now, it should be clear that having a deep understanding of 501(c) organizations is essential.
However, when applying for 501(c) designation, it is important to choose the appropriate type of nonprofit that your organization’s activities represent.
This process often begins with a visit to the IRS website. Unfortunately, the process of choosing the right nonprofit type coincides with reading through some dense tax language. It is important to read through the IRS website and their explanations for the types of tax-exempt organizations so you can apply for exemption with confidence. You can also find expert attorneys or tax consultants with nonprofit-sector specializations who can help guide you through the process.
Thankfully, the IRS also has an extensive catalog of resources and information all available on their website that will help you understand which nonprofit type is most appropriate for your organization to apply under.
Not only does the IRS provide easy-to-access documentation of their tax code, regulations, and revenue procedures (among other official guidance), they also offer:
Forms and instructions
Live training events, for those who prefer learning in an in-person setting
When reviewing the content that is available on the IRS website, be sure to pay special attention to the requirements, regulations, and restrictions associated with each type of 501c nonprofit.
For example, you may initially assume that your organization meets the requirements of a charitable organization (designated as a 501(c)3 by the IRS). However, perhaps your organization engages in significant lobbying and political action activities—while also engaging in some charitable causes. Despite the charitable work your organization does, you would be classified as a 501(c)4 due to lobbying and political action.
Being able to identify and secure these specific classifications will benefit your organization by ensuring it can collect certain types of revenue and attain the benefits that are your organization’s right under the law.
There are also a variety of sources on the internet to help you better understand the process of becoming a 501(c) entity.
Instrumentl, for example, provides helpful articles, FAQs, and courses on various topics focused on different aspects of nonprofit management, including advice on 501(c) classifications.
Below are just a few 501(c) focused topics covered by Instrumentl:
For the best guidance, it is good practice to seek out the services of experts such as an attorney or tax expert to guide you through the process of identifying the right 501(c) classification.
6 Types of 501c Nonprofits
Now comes the interesting part! What are the types of 501 nonprofits that exist and how are they different and how are they similar?
We will take a look at some of the most common 501(c) classifications with examples so you can become better acquainted with them and better identify the type of nonprofit organization your own nonprofit would fall under.
501(c)3: Charitable Organizations
We will start with the most common 501(c) designation and one that you may already be quite familiar with—501(c)3.
A 501(c)3 nonprofit organization is generally known as a charitable organization. When you hear the term nonprofit being used by a layperson they are most likely referring to this type of nonprofit.
A 501(c)3 nonprofit organization is founded exclusively to provide charitable services and programming across various areas that benefit the public including:
Prevention of cruelty to children
Prevention of cruelty to animals
Many organizations with 501(c)3 status that you are probably familiar with are museums, universities, hospitals, and well known social and human service organizations like the YMCA, the American Red Cross, the United Way, and the Salvation Army.
Notably, any donations or charitable gifts made to 501(c)3 organizations are tax-deductible.
One notable restriction placed on 501(c)3 nonprofits is that they are limited in the amount of politics and lobbying they can engage in.
That is not to say that certain types of political engagement or legislative action is outright banned. Many 501(c)3 nonprofit organizations are dedicated to policy and systems change to improve their communities and advance their missions.
For instance, many 501(c)3 organizations advocate for broader civic engagement through non-partisan voter registration. This is not a banned activity for 501(c)3 nonprofits, though it is a political activity.
However, 501(c)3 nonprofits cannot endorse or directly oppose the campaign of a specific candidate running for public office. The organization cannot make official statements in support of a campaign nor can it take an official stance against a candidate. Nonprofits however are not restricted from commenting about matters of public policy.
For instance, many nonprofits with 501(c)3 designation spoke out vehemently against the overturning of Roe v. Wade by the U.S. Supreme Court, especially 501c(3) nonprofits that support women’s healthcare or abortion access.
501(c)3 organizations like Midwest Access Coalition spoke out in support of dissenting judges and reaffirmed their mission to provide access to abortion care no matter what future outcomes might bring.
If you have ever donated to a local nonprofit, taken a class at an educational institute, or visited a local cultural center you likely have benefitted from or have supported the work of a nonprofit with a 501(c)3 designation. Consider checking out some of your favorite local nonprofits and see if they have a 501(c)3 classification. It is very likely they do!
501(c)4: Social Welfare Organizations
Though not nearly as common as 501(c)3 nonprofits, 501(c)4 classified organizations are quite common as well.
According to the IRS, 501(c)4 organizations operate for the promotion of the general welfare of the public and unlike 501(c)3s are not restricted from being direct participants in public policy processes and politics through lobbying activities. In fact, a 501(c)4 entity’s ability to directly influence legislation is one of the key attributes of the classification.
While the IRS defines 501(c)4 nonprofits as social welfare organizations, they are also commonly known as “action organizations”.
An "action" organization primarily or entirely engages in direct or grassroots lobbying related to advocacy in support of or in opposition to public policy or legislation.
Nonprofits like the American Civil Liberties Union (ACLU), the Color of Change, the American Association of Retired Persons (AARP), the March for Our Lives Action Fund, and the Conservation Campaign are all examples of nonprofits with 501(c)4 designation.
Due to the fact that 501(c)4s have so much freedom to support political action and campaigns, donations and gifts made to these entities are not tax deductible. So while 501(c)4s can still solicit donations in the same way 501(c)3s can, donors cannot deduct their gifts.
Moreover, the political affiliation and activities of 501(c)4s typically result in ineligibility for many grant opportunities. It is very common for private foundations to list lobbying as an ineligible activity for potential grant seekers.
501(c)5: Labor and Agricultural Organizations
According to the IRS, a 501(c)5 nonprofit is an organization that “provides for the exemption from federal income tax of labor, agricultural, or horticultural organizations”. Common 501(c)5 organizations that you may be a member of or have benefitted from are county fairs, farmers markets, or labor unions.
For example, the Service Employees International Union (SEIU) is a labor union that consists of over 2 million members and advocates for the dignity of workers from a variety of backgrounds and across three primary sectors—healthcare, property services, and public services. This union protects workers such as janitors, building service workers, nurses, security guards, food service workers, and government employees.
Like 501(c)4 organizations, 501(c)5s are not prohibited from political action and are allowed to influence legislation and advocate for or against policies that would benefit their members. Many labor unions like the SEIU will partner in coalition with other unions or 501(c)4 action groups to lobby for legislation that would benefit a shared constituency.
501(c)5s can accept contributions from individuals or labor unions although such contributions are not tax deductible. However, membership dues paid by a union member to their 501(c)5 affiliated union are fully tax deductible, unless the activities of the entity in question are for the sole purpose of political activity.
Most often, in the case of labor unions, their primary function is to provide services, care, and advocacy on behalf of their members and check the power of corporations or other hiring entities that employ their members. Oftentimes, labor unions will provide healthcare and other benefits to their members and will fight on behalf of their members for fair work contracts, pay, hours, schedules, and more.
501(c)6: Business Leagues
501(c)6 nonprofit organizations, also known as business leagues or sometimes referred to as industry associations, are entities that are focused around shared business interests or industry needs, rather than charitable causes or advocacy (though 501(c)6 organizations are not explicitly prohibited from political activities).
Examples of common business leagues you may be familiar with are chambers of commerce, boards of trade, or economic clubs. These organizations exist to lift up the interests of businesses or specific industries, and support economic growth in the communities and regions where they operate.
The Minneapolis Regional Chamber is a perfect example of a 501(c)6 organization. The Chamber works to foster a thriving business community in Minneapolis through the development of coalitions and partnerships, and ensuring access and opportunity for all.
Since 501(c)6 organizations are primarily focused on the betterment of private enterprise with the public good as a secondary priority (if a priority at all), donations to 501(c)6 organizations are not tax deductible. As such, these entities rely on membership fees for their operational revenue.
Due to the fact that membership fees are the primary source of revenue for a 501(c)6, self-sustainability can be challenging. Since membership fees are not tax deductible the organization has to find other ways to encourage long-term membership and support.
Oftentimes, to encourage membership, 501(c)6s will offer members exclusive benefits such as:
Professional development opportunities
Exclusive access to content intended to help generate leads, revenue, or facilitate lucrative partnerships, among other privileges
501(c)7: Social and Recreational Clubs
A 501(c)7 is most commonly known as a social or recreational club.
These entities exist to bring together individuals with shared interests or common goals. Some common examples of 501(c)7 organizations are homeowners associations, country clubs, hobby clubs (such as a book or gardening club), sororities and fraternities, or sports clubs.
According to the IRS, to achieve 501(c)7 status, the club must provide opportunity for contact between members, the club must be supported by membership fees, dues, or assessments, and membership to the club must be limited (meaning there must be some requirements for who can join).
While a 501(c)7’s primary sources of income are membership fees or dues, a 501(c)7 is able to derive at most 35% of revenue from nonmember sources, with no more than 15% derived from nonmember use of services or facilities.
501(c)8: Fraternal Beneficiary Societies
Last but not least are 501(c)8 nonprofits or fraternal beneficiary societies.
As stipulated by the IRS, an entity is considered a 501(c)8 if it operates with a fraternal purpose with membership based on a common tie or shared objective. While at first glance a 501(c)8 may appear very similar to a 501(c)7, there are several key differences.
Notably, a 501(c)8 must provide the payment of life, accident, sick, or other benefits that are commonly associated with an employer. Common examples of 501(c)8s are the Knights of Columbus, the Elks, or the Shriners.
Wrapping Up: The Next Steps
As illustrated in this article there are many different types of 501(c)nonprofits.
Understanding the types of 501 nonprofits, and the benefits, restrictions, and regulations associated with each, is key to setting a solid foundation for your own nonprofit.
Interested in learning more about nonprofit management? Visit Instrumentl for up to date resources, guides, FAQs, and grant writing classes that will help you grow your nonprofit and ensure its long-term success and sustainability.
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