501(c)(3) Tax-Exempt Organization

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The requirements for obtaining a federal tax exemption due to qualifying as a 501(c)(3) charitable organization are contained in 26 U.S.C. §501(c)(3) state:

Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

Many types of groups can seek non-profit status. The following ones may be eligible: childcare centers, shelters for the homeless, community health care clinics and hospitals, museums, churches, synagogues, mosques, and other places of worship, schools, performing arts groups, and conservation groups.

Forming a non-profit corporation can protect its staff from the corporation’s debts and liabilities. If any employee obtains a judgment against the non-profit, this judgment can reach only the non-profit corporation’s assets. Personal assets of all the people working in the non-profits are shielded from personal liability.

Organizations that attain 501(c)(3) federal tax exempt status must first register in their state of operation as a non-profit corporation. The next step is to fill out Form 1023 and submit it to the IRS. Upon a granting of 501(c)(3) status, donors who give to the organization can take a tax deduction on their donations.

Non-profits that choose to incorporate are classified into one of the following three categories. The chosen category must be stated on the Articles of Incorporation that are submitted to the state for filing. The three differ from one another primarily in stated purpose, how their assets can be distributed, and the amount of regulation.

Public Benefit Corporations

– A public benefit corporation may be formed for either a charitable or a public purpose, may not distribute assets to members or directors, and are subject to the most extensive regulation.

– A public benefit corporation may apply for a federal tax exemption as a 501(c)(3). For more information on which public benefit corporations qualify under 501(c)(3), please read our blog post entitled Considering 501(c)(3)? Charity vs. Charitable.
See Public Benefit Corporation

Mutual Benefit Corporations

– A mutual benefit corporation may be formed for any lawful purpose, may distribute assets to members or directors upon dissolution and are subject to less extensive regulation than a public benefit corporation.

– A corporation with a public benefit or charitable purpose may file as a mutual benefit corporation to avoid the amount of regulation a public benefit corporation is subject to, but only if the corporations’ assets are not dedicated to a charitable, religious or public purpose. Additionally, if a non-profit corporation wishes to file for a 501(c)(3) tax exemption, they are not eligible as a mutual benefit corporation.

Religious Corporations

-A religious corporation may be formed for a religious purpose, and may not distribute assets to members or directors, but are subject to the least regulation of the three categories.

Regardless of the type of non-profit, profits cannot be divided among corporation members beyond reasonable salary payment. A non-profit corporation cannot be sold for money. If its board of directors decided to dissolve it, its debts and liability have to be paid off, and all its assets need to distributed to another non-profit corporation.The government provides non-profit organizations with many benefits, but they also post some regulations to limit certain behaviors. It is necessary set up a consultation with a lawyer and know the benefits and drawbacks for a non-profit.