What is a 501(c)(3) Organization? Definition and Examples

501(c)(3) organizations are everywhere. In fact, most nonprofit organizations in the United States are IRS-recognized, tax-exempt entities. 

But how are they formed, and what are their advantages? Not to worry!

The answers to all your questions have been carefully collated into this helpful guide. 

Whether you’re a professional seeking some new knowledge, a business owner looking to diversify, or an entrepreneur with an idea for a fantastic new charity, you’re in the right place.

So, what are we waiting for? Let’s get into it!

Key Takeaways

• A 501(c)(3) is a unique form of nonprofit that is tax-exempt under section 501(c)(3) of the Internal Revenue Code.
• There are multiple requirements to set up a 501(c)(3) such as restricting profits to shareholders and compensating employees.
• Three types of 501(c)(3) organizations exist: Public charities, private foundations, and social welfare organizations.
• 501(c)(3) organizations have many advantages and disadvantages from the ability to receive grants to being restricted from politics.
• There are five important steps to set up a 501(c)(3) that include creating bylaws and registering with your state authority.

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

If you’re like me and first looked at the name 501(c)(3) not knowing what it meant: Don’t worry – it’s not just a bunch of random letters and numbers!

A 501(c)(3) is actually a unique form of nonprofit that is tax-exempt under section 501(c)(3) of the Internal Revenue Code. 

They exist for charitable and religious reasons, as well as for services that benefit a specific group or the public as a whole.

The purpose of this classification was to encourage organizations to work for the greater good of society by supporting communities in need. 

By exempting them from taxes, the government believed that these organizations would be more inclined to grow and help others.

What are the requirements of a 501(c)(3) organization?

Do you want to register as a 501(c)(3) organization? To do so, you will need to meet each of the qualifications listed below:

• Not serving any private interests. 501(c)(3) organizations are about giving, not taking. They must operate in the interest of the public and not for the profit of private individuals or groups.
• Earnings can’t benefit owners or shareholders. Money made from 501(c)(3) organizations cannot, under any circumstances, go into the pockets of owners or shareholders. Any revenue made must go straight back to the cause and the groups they support.
• No influence or legislation or political campaigns. Similarly, 501(c)(3) organizations must not aid or participate in political campaigns or lobbying. They exist for charity, not votes.
• Reasonable compensation for employees. Although charitable, 501(c)(3) organizations are not 100 percent volunteer-based. Employees must be compensated fairly for their work.
• Remain true to its mission. Just like Tom Cruise, 501(c)(3) organizations must stick to their mission. They cannot suddenly support or work towards something not initially outlined in their goals.
• No substantial income from unrelated business operations. No side hustles. 501(c)(3) organizations are made for one purpose and one purpose only. Money made elsewhere cannot outweigh that of their primary objective.
• Required to withhold federal income taxes from employees. Like any other workplace, the employees of 501(c)(3) organizations must still pay tax on their income.

501(c)(3) Organization Examples

501(c)(3) organizations exist all around us. You might even recognize a few.

The American Red Cross, Habitat for Humanity, and UNICEF are all well-known 501(c)(3) organizations. 

They encompass a wide range of missions and communities, allowed to work with ease due to their 501(c)(3) status.

Types of 501(c)(3) Organizations

Now that you know the basics, it’s time to delve into the three types of 501(c)(3) organizations:

• Public charities. Exclusively working towards their exempt purpose, public charities are funded in large part from public donations. If you’ve ever donated to a charity, it was most likely a public 501(c)(3).
• Private foundations. Contrary to public charities, private foundations are entirely funded by one family or corporation. Private foundations then use this money to provide grants to organizations that need it most.
• Social welfare organizations. Funded both through public and private means, social welfare organizations differ in that they focus on advocacy and policy change rather than providing direct support to those in need.

Advantages and Disadvantages

This all seems pretty great, right? Well, hold your horses: it’s important to weigh up the pros and cons of 501(c)(3) organizations before starting the world’s next best charity.

Advantages	Disadvantages
Tax-exempt status	Certain activities restricted e.g. politics or lobbying
Receive grants and donations	Strict compliance with all 501(c)(3) specific laws and regulations
Public credibility	Difficult application and reporting process
Supporter access to deductible donations	Unrelated business activity limited

How to Create a 501(c)(3) Organization

So, you’ve decided that a 501(c)(3) organization is the way to go? To get started, follow the steps below:

1. Decide what type of nonprofit you want to create. First, you must determine who you intend to support and why. What’s your mission? What’s your purpose? Pinning this down will make the rest a lot easier.
2. File for 501(c)(3) tax exemption. Contact the Internal Revenue Service (IRS) to secure that sweet, sweet tax-exemption status. To do so, fill out Form 1023 or Form 1023-EZ and submit it with the required documentation and fees
3. Prepare and file your incorporation paperwork. Choose between either the corporation or unincorporated association legal structure and head to your state’s business registration office with the necessary paperwork. This is an extremely important step that will give your new charity the proper legal framework it deserves.
4. Create your bylaws. Bylaws define the internal rules and operating procedures of your 501(c)(3) organization. These will prevent all future headaches by clearly outlining your organization’s structure, decision-making processes, and all other practical matters.
5. Register as a charity with the appropriate state authority. This step varies from state to state, but the general rule of thumb is to register your nonprofit with the charitable solicitation office or attorney general’s office.

Next Steps

Congratulations – you now know what it takes to set up a 501(c)(3) organization.

However, it’s not over yet. It’s important to remember that a continued sense of curiosity and hunger for knowledge is key to guaranteeing success in not only business but all industries. 

Ask more questions, read more articles, and stay open to learning new things!

You’ve already taken the first step on your nonprofit journey, and it’s not long now until you can start making the positive impact you desire.

Get out there and change some lives!

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