The Nonprofit FAQ

Which kind? 501(3)(3), 501(c)(4) or 501(c)(6)?
Martin C. Wilson asked in nonprofit (see http://www.rain.org/mailman/listinfo/nonprofit) on August 8, 2003:

Would it best for a Community Development Corp. to file as a 501(c)(3) or 501(c)(4)?

Sandy Deja of Exemption Advisory Services (see http://members.aol.com/exempts/full.htm) responded:

There is a chart comparing 501(c)(3) and 501(c)(4) in the "Miscellaneous" section of my public service website http://www.form1023help.com. Generally, the choice depends on the organization's activities. Exclusively charitable and/or educational activities = 501(c)(3).

You can find a discussion of 501(c)(3) and economic development in an Internal Revenue continuing professional education (CPE) text at http://www.irs.gov/pub/irs-tege/eotopicg92.pdf A section of the Internal Revenue Manual on Religious, Charitable, Educational, Etc., Organizations also discusses this topic. See http://www.irs.gov/irm/part7/ch10s04.html -scroll down to 7.25.3.10.3.2 (02-23-1999) Economic Development

As a practical matter, I believe most community development organizations these days seek 501(c)(3) status because deductibility of contributions is seen as a significant advantage.

I generally advise folks to try for the best status they could hope for [501(c)(3) in this case]. If the IRS does not believe you qualify, they are very likely to suggest 501(c)(4) as an alternative, so you are no worse off.

Sandy Deja

Author of "Prepare Your Own 501(c)(3) Application" an ebook for lay people - http://www.501c3book.com/

Shelley Arenas wrote to NonprofitNetworking (a email discussion list for nonprofits in Washington state -- see http://groups.yahoo.com/group/NonProfitNetworking/) on April 8, 2005.

She asked for help finding donated equipment for a new Chamber of Commerce to serve eastern Lewis County (see http://www.eastlewiscountychamber.com ).

Ken Ristine of the Ben B. Cheney Foundation in Tacoma answered:

You are aware that as a Chamber of Commerce your organization will be a 501(c)(6) and not a 501(c)(3), which means that you won't be eligible for much in the way of grants from foundations.

If your organization plans on doing charitable activities in addition to CofC work, then you might consider starting up a separate, but connected, 501(c)(3)...like a CofC Charity Fund.

CofCs generally raise most of their money through memberships and other projects that are CofC work. The 501(c)(6) status of a CofC helps by
  1. sheltering the funds from income tax if the organization runs an excess in a tax year
  2. helping legitimize the business member's deductibility of memberships or other funding provided as a business deduction (not a charitable deduction)
  3. may qualify the CofC for some other tax breaks.

If you plan to have activities that are charitable in nature (like providing scholarships) you really need a separate organization to qualify those contributions or to get foundation grants. The organization doing charitable work can get a 501(c)(3) recognition from the IRS.



Posted 8/9/03; IRS reference revised with live links and c6 added, 4/8/05 -- PB