Is a 501(c)(3) right for my organization?

The key element behind most nonprofit organizations is a desire to give back to the community or those in need. Most nonprofit organizations are socially minded, though the 501(c)(3) designation can apply to different groups, including churches, unincorporated associations, trusts and foundations. In layman terms, many people refer to 501(c)(3)’s as charitable organizations.

Choosing a tax-exempt organization is a major step for any organization and it requires a close look at one’s structure, goals and financing to make sure it’s the right fit.

Primary benefits in choosing the model

The Foundation Group provides six core benefits to registering as a 501(c)(3):

  • Exemption from federal and state corporate income tax
  • Exemption from state sales tax and select property taxes
  • Ability to apply for specific public and private grants
  • Different thresholds for state and federal tax liabilities
  • Public legitimacy from the official IRS designation
  • Discounted rates through the US Postal Service

Important factors to consider

The 501(c)(3) designation can be a difficult decision for social entrepreneurs. As mentioned above, the designation is a mark of authenticity, but it’s highly regulated in terms of fundraising and how profits are disbursed. The IRS-enforced mechanisms restrict how a venture can raise capital so if your organization requires significant resources it will impact how you can do that. Generally speaking, there are higher management costs for a nonprofit because it involves more administrative work. It’s possible to raise significant funds with either model, but nonprofits have unique restrictions that require accomodation. A for-profit model allows greater flexibility.

There are pros and cons to any structure, but choosing a 501(c)(3) is not necessarily an either/or situation. Depending on organization needs and capabilities, some companies use a split model where with two separate organizations: one that seeks private investors who want a monetary return and another organization to seek donations and serve a philanthropic mission.

Complex, but with measurable benefits

Registered nonprofits can save time, pay less in taxes and feel good about their commitment to the community. To meet the criteria, though, an organization needs to be vigilant in its paperwork and dedicated to meeting government requirements. Anyone considering a 501(c)(3) or similar entity should consult with an experienced attorney to make sure that your structure is compliant with government requirements.

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