What is the Difference Between a 501c6 and 501c3?
When you’re navigating the nonprofit world, it can be difficult to distinguish between the various types of organizations, what they mean, and what they do.
In this article, we’ll demystify the difference between a 501c6 vs 501c3, equipping you with the information you need to be successful at your organization.
What is a 501c3 Organization?
You may not know it, but when you think about a nonprofit organization, you’re typically thinking about a 501c3. These are typically the charitable organizations you see commercials about or get stopped at the cash register to donate to.
501c3s operate mostly for charitable, religious, scientific, or educational purposes and generally contribute to the greater good of society in some way. 501c3s serve the less fortunate and help poor or underserved communities, including humans, environments, and animals.
Ultimately, these organizations serve the public, and because of that, any donations to a 501c3 are tax deductible.
Now, even within a 501c3 organization, there can be distinctions—-for example, whether you are publicly or privately funded. The American Society for the Prevention of Cruelty to Animals (ASPCA) is a privately funded 501c3. They depend on private donors to fund their operations. Most 501c3s will be privately funded foundations unless otherwise stated.
Organizations can file for an IRS exception to qualify as a public charity as long as they get the majority of their funding from the public. These organizations often include churches, schools, hospitals, medical research organizations, and more.
The Breast Cancer Research Foundation qualifies as a publicly funded 501c3 because a substantial part of its funding comes from the general public or governmental support.
How you get your funding impacts if you’re public or private, but it has no effect on your status as a 501c3 organization. As long as your organization serves the public in some way, you can be classified as a 501c3.
What is a 501c6 Organization?
501c6s are also organizations that rally around a common purpose; however, instead of a charitable cause, a 501c6 is typically organized around a common business interest or need.
Think about the city that you live in. There’s likely a chamber of commerce. Maybe there’s an economic club, board of trade, or something sports-related that has an organization surrounding it. That is a 501c6 organization.
A 501c6 is focused on the overall health of an industry, and these can include finance, telecommunications, professional services, food, and more.
The Chicagoland Chamber of Commerce is a great example of a 501c6 organization. They organize events that help promote business within the city, honoring key players to drive revenue to invest back into the business community.
At the end of the day, a 501c6 is intended to help further those business interests for the good of the organization first, with the good of others or the greater community further down the list—if listed at all.
As opposed to a 501c3, a 501c6 depends on its member revenue to fund its operations. These contributions are not tax deductible, so it can be more challenging to solicit donations. However, you do have a lot more freedom as to what you can do in a 501c6 vs 501c3.
Main Differences Between a 501c3 and 501c6 Organization
Once you know what you’re looking for, it gets easier to tell the difference between a 501c3 and 501c6. Here are the big five to look out for, so when you’re considering between a 501c3 vs 501c6, you know what to apply for.
When you’re looking at a 501c6 vs 501c3, the biggest indicator is going to be the organization’s mission, particularly their purpose and their activities. Typically, 501c3s can have a wide range of missions, including health care, religion, the public sector, environmental issues, education, the arts, and more.
A 501c3 provides benefits for those most in need, and as a result, their actions don’t stray too far from their mission. All of their events, communications, and fundraising efforts are in support of that greater goal.
For example, an educational nonprofit might hold a book drive or a campaign to fund a new after-school program. Both of these activities are closely tied to their mission.
On the other hand, a 501c6’s mission can be a little broader. They don’t have to be charitable. Instead, they promote common interests and strive to improve overall business and industry conditions.
Sure, the bulk of their efforts should still support the overarching goal. If you have a food-industry-based 501c3, most of your events should go toward educating others on the upcoming trends in the food industry or suggestions on how to be more sustainable—topics that could help propel the industry forward.
However, you could have a guest speaker join who’s a CEO in another industry to share learnings to mix things up without fear of losing your status. In 501c6s, you have a little more freedom in your programming choices.
2. Tax Deductible
One of the biggest ways nonprofits solicit support is by offering tax deductions for donations. Donors feel good about giving back and supporting causes that are meaningful for them while also getting a tax break for doing so. It’s a win-win, but only for 501c3s.
For a 501c3, contributions are considered charitable donations and are therefore tax deductible. For a 501c6, they are not. They are not charitable contributions and, as such, are not tax deductible under current IRS laws.
Now, many members will still want to support industry organizations, so it’s not a complete loss! You just have to target them differently. Instead of pulling at their heartstrings, appeal to their business senses. Tax deductions don’t have to make or break a 501c6 vs 501c3.
3. Reporting Donor Information
Both 501c3 and 501c6 organizations are able to take donations, though only contributions to 501c3s are able to be written off. That said, there are still some restrictions with the IRS concerning donor information when you’re looking at 501c6 vs 501c3 organizations.
Because they’re not deductible, 501c6s are not required to report any donor information to the IRS, regardless of the amount. Your donors also don’t have to account for these funds since they’re not claiming them on their taxes. 501c6s also don’t have to disclose any information to the public about their donors.
On the other hand, 501c3s are required to report donor information to the IRS, but only for gifts of $5,000 or more. Again, your donors will likely be claiming this on their taxes, so they will claim it regardless of the amount.
If your 501c3 is private, you need to disclose your donor information to the public, typically through annual reports. Public nonprofit organizations are not required to share this information.
4. Tax Exemption Status
Another one of the main differences between a 501c3 and 501c6 is the tax-exempt status. 501c3s are exempt from federal, state, and local taxes as long as they file form 1023 or 1023-EZ with the IRS, which can cost either $600 or $275.
A 501c6 is exempt from federal taxes, but they may not be from state and local taxes. They are required to file the 1024 Form to receive their Letter of Determination, which could cost $600.
5. Lobbying and Campaigning
When it comes to participating in lobbying or political campaigning, 501c6s have a little bit more freedom, as long as they notify their members of their activities.
501c3s can engage in unlimited lobbying, but they cannot engage in any political campaigning.
So what that means is that they can advocate for themselves, pushing for legislation and causes that could benefit their organization; however, they cannot back any political parties or candidates and contribute to their campaigns as an organization.
On the other hand, 501c6s can lobby and campaign, but they have to notify their members of the percentage of dues that are used for lobbying and other political activities—and it has to be 49 percent or less of the resources raised for the organization. Additionally, the organization may need to pay a proxy tax, which is a tax penalty based on how much funds were used on lobbying.
Wrapping Up: What is the Difference Between a 501c6 and 501c3?
When learning how to tell the difference between a 501c3 and 501c6, you want to keep an eye on five different pieces.
- Mission is everything. If it serves the greater good, it’s probably a 501c3, while if it’s industry-based, you’re looking at a 501c6.
- Only donations to 501c3s are tax deductible.
- Because of that, 501c3 organizations have to disclose much more information about their donors than 501c6s.
- 501c3s are fully tax exempt. While 501c6s will be exempt from federal taxes, state and local taxes may apply.
- 501c6s have more freedom when it comes to lobbying and political campaigning as long as they disclose their activities.
There are, of course, many other factors at play when it comes to these nonprofit classifications, especially when you dig down into the IRS tax laws. However, if you’re looking to understand the difference between a 501c3 vs. 501c6, these distinguishing factors should help.
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