In the United States, nonprofit organizations can fall into over 25 different categories according to the Internal Revenue Service (IRS), with three of the most common being 501(c)(3), 501(c)(4), and 501(c)(6). While these categories may sound the same, they each have unique purposes and must adhere to IRS regulations.
A 501(c)(3) organization is the most well-known type of nonprofit. Recognized by the IRS as tax-exempt, these organizations focus on charitable, religious, educational, scientific, or literary purposes. They operate exclusively for these objectives and face strict regulations, including limitations on political campaign activities and lobbying. Donations to 501(c)(3) organizations are tax-deductible for individuals, and they generally do not pay federal income tax. Under the 501(c)(3) designation, there are three main types of organizations: charitable foundations, private foundations, and private operating foundations.
501(c)(3) charitable foundations are the “boots on the ground” organizations. They have specific programs to serve their mission and meet the needs of their community such as animal welfare or preventing domestic violence. They are also governed by a diverse, volunteer board made up of (at least 50%) unrelated members that each bring expertise to the organization. Additionally, Charitable organizations need to be able to pass the public support test by their 6th year of operation, which means they must have diversified streams of revenue. Examples of 501(c)(3) charitable organizations are Habitat for Humanity and the Salvation Army.
501(c)(3) private foundations mainly exist to fund charitable foundations. They are not required to pass the public support test and their board can be made up entirely of family members, business partners, etc. They are subject to different tax requirements such as donating at least 5% of their assets to charity, and paying a small tax on their investment earnings. The Bill and Melinda Gates Foundation and The Rockefeller Foundation fall into this category. Private operating foundations are a hybrid between charitable foundations and private foundations. Private operating foundations conduct their own programs and directly operate charitable projects to fulfill their mission without having to adhere to the strict regulations of a charitable foundation. Libraries and museums are some examples of 501(c)(3) operating foundations.
On the other hand, a 501(c)(6) organization is a nonprofit that promotes the interests of a specific industry or profession. These can include business leagues, chambers of commerce, or professional associations. 501(c)(6) organizations unite individuals and businesses within their industry to advance common goals. While they can engage in lobbying activities to influence legislation related to their field, these activities must be secondary to their primary purpose and its members must be informed. These organizations seek to benefit their members. Contributions to 501(c)(6) organizations are generally not tax-deductible as charitable donations but may be deductible as business expenses for members or sponsors. Examples of 501(c)(6) entities are the National Hockey League and the American Medical Association.
Finally, a 501(c)(4) organization is a social welfare organization that works to promote the common good and social welfare of a specific community. Where a 501(c)(6) seeks to advance its members, a 501(c)(4) seeks to support its community. Unlike 501(c)(3) organizations, 501(c)(4) entities can also engage in political activities, such as lobbying and advocating for specific legislation or candidates. Contributions made to 501(c)(4) organizations are not tax-deductible for individual donors, and these organizations may be subject to income tax on certain types of income. Examples of 501(c)(4) organizations are Homeowners Associations and advocacy groups such as the National Rifle Association.
In a Nutshell
Overall, while these nonprofit categories share the goal of making a positive impact, their specific focuses and allowable activities differentiate them under IRS guidelines.