501(c)(3) vs 501(c)(4): Differences, Regulations & Set up

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Making a comparison between 501(c)(3) vs 501(c)(4) when it comes to registering with the IRS can be considered to be an ‘apples to oranges’ comparison. The two registrations are intended for different organizations with different end goals.

However, in the long run, one ends up complementing the other. This is why many large-scale nonprofits run two organizations, each registered under one of the two options.

For example, the American Civil Liberties Union (ACLU) operates as a 501(c)(4) for advocacy and lobbying, and the ACLU Foundation is its 501(c)(3) arm for litigation and public education.

Let’s have a look at each type of organization in short:

What is a 501(c)(3) registered organization?

Registering an organization with the IRS as a 501(c)(3) is preferable when the organization prioritizes charitable work and looks to maximize fundraising through tax-deductible donations and seeks grant funding.

Politics is a strict no-no; the organization must file all financial papers with the IRS for audits.

What is a 501(c)(4) registered organization?

Registering an organization with the IRS under section 501(c)(4) allows it to do charity work to some extent, but its primary focus is political lobbying and endorsements.

You don’t get the tax deductibles under 501(c)(4). However, donors can keep their names secret, and the organization does not have to file many papers with the IRS.

The long and short of this is that the IRS promises to keep an eye on 501(c)(3) orgs so that average citizens can donate without concern, and keeps public donations for charity out of politics. It does less of this for 501(c)(4) orgs, which are allowed in politics.

Now that this much is clear, let us focus on the advantages and disadvantages of registering under 501(c)(3) and 501(c)(4), why the best idea is probably to maintain two organizations, and the dangers to watch out for when this is done.

501(c)(3) vs 501(c)(4): Understanding the key differences

Let us briefly overview the two types of nonprofit organizations, taking their classifications from the US Internal Revenue Code. The significant similarities are few and can be rounded up as:

Both are nonprofits.
Both must file annual IRS forms (Form 990).
Both are exempt from federal income tax.

However, the differences must be noted after careful comparisons, especially in the law’s wording and intent. Have a look below:

Definition and purpose

501(c)(3): Charitable, religious, educational, scientific, or literary organizations focusing on direct public benefit and open membership.
501(c)(4): Civic leagues, social welfare organizations, and some employee associations, where the primary purpose is to promote social welfare and community in general (rather than specific on-ground actions).

Donations and tax

501(c)(3): Donations are tax-deductible for donors, a significant incentive for fundraising.
501(c)(4): Donations are generally not tax-deductible (some exceptions for business expenses).

Lobbying: Main difference between 501(c)(3) and 501(c)(4)

501(c)(3): Limited lobbying (subject to expenditure limits and reporting requirements). Prohibited from endorsing/opposing political candidates or parties.
501(c)(4): Can engage in unlimited lobbying for their mission. Allowed to participate in political activity as long as political activity is not the primary purpose.

Funding

501(c)(3): Eligible for grants from foundations and government agencies, but relies heavily on public donations.
501(c)(4): Unlikely to receive foundation grants open to the public. This organization relies on member dues and (non-tax-deductible) donations from interested parties.

Reporting

501(c)(3): The IRS has higher transparency requirements, with the org’s records open to the public. Also, Form 1023 must be filed for tax-exempt status. Further, donor information must be disclosed for large gifts.
501(c)(4): Form 1023 is optional. There are also lower donor disclosure requirements from the IRS, and the records are not open to the public. This allows more privacy for contributors. However, because they can be political, Form 8976 (Notice of Intent to Operate) must be filed within 60 days of formation.

So these are the fundamental differences between the two. Now, let us look at why organizations choose to run both kinds of registrations.

501(c)(3) vs 501(c)(4): Choosing the right structure

Running two organizations – one 501(c)(3) and one 501(c)(4) – is a common strategy for nonprofits that want to combine charitable work with more extensive lobbying and political advocacy.

This dual structure is used by organizations like the Sierra Club, which has a 501(c)(3) foundation for charitable activities and a 501(c)(4) for lobbying and political work.

Having both allows the 501(c)(3) to raise tax-deductible funds for charitable and educational programs. In comparison, the 501(c)(4) can carry out robust advocacy and political engagement without jeopardizing the tax-exempt status of the 501(c)(3).

This dual structure enables nonprofits to address issues from multiple angles – education and service through the 501(c)(3) and power-building, advocacy, and political influence through the 501(c)(4).

Maintaining clear separation and compliance between entities is critical to avoid IRS penalties. So let’s look at those penalties and the regulations now.

501(c)(3) vs 501(c)(4): Liabilities, regulations and restrictions

Operating both a 501(c)(3) and 501(c)(4) requires strict adherence to IRS rules to avoid jeopardizing the tax-exempt status of the 501(c)(3). Have a look at things to keep in mind:

Each entity must have distinct names, Employer Identification Numbers (EINs), bylaws, and governing documents. Maintain distinct branding (logos, letterhead) and donation portals.

Each organization must file its own IRS forms using its own EIN and financial records.

Maintain independent boards with minimal overlap (avoid 100% identical membership).

The 501(c)(3) cannot fund the 501(c)(4)’s lobbying, political campaigns, or non-charitable activities. Open and use separate bank accounts for each entity. Never co-mingle funds between the organizations.

The 501(c)(3) must not subsidize the 501(c)(4), directly or indirectly. Any grants from the 501(c)(3) to the 501(c)(4) must be restricted to permissible charitable purposes and carefully documented. Generally, avoid making grants or loans from the 501(c)(3) to the 501(c)(4) unless absolutely necessary and legally vetted.

Draft a ‘Cost-Sharing Agreement’ between the 501(c)(3) and the 501(c)(4), outlining rent, staff, and equipment allocations if you share resources (office space, admin staff, etc.), and ensure timely reimbursement.

Use separate bank accounts, payroll systems, and employee time-tracking.

501(c)(4) risk losing their exempt status if political work dominates their operations. Track time and expenses dedicated to political activities, and ensure they are less than social activities.

501(c)(3) vs 501(c)(4): Best of both worlds

Understanding the distinctions between 501(c)(3) vs 501(c)(4) organizations is essential for anyone seeking to maximize their nonprofit’s impact while remaining compliant with federal regulations.

For organizations that wish to pursue both charitable work and robust advocacy, operating affiliated 501(c)(3) and 501(c)( 4) entities can be a powerful approach.

You can find out more about running a nonprofit through these resources:

Feature image by StockSnap from Pixabay

Vinayak Hegde

Vinayak Hegde is a content marketer who has been covering non-profits, changemakers, and advocacies for over six years. His experience includes all forms of digital content creation, including text, audio, and video.