The designation 501(c) is an Internal Revenue Service label indicating an organization’s exemption from paying income tax. A 501(c) organization provides nonprofit services or support to the public or other charitable groups and is responsible for complying with standards outlined in section 501 of the IRS code. Gaining official nonprofit status begins with identifying a nonprofit category and understanding restrictions placed on nonprofit businesses. Organizations then apply for 501(c) status with the state and the IRS.
Organizations are called nonprofit when all profits earned are reinvested back into the company and are not distributed to owners, board members, officers or employees. A nonprofit may be a corporation, limited liability company, trust or unincorporated association. Partnerships and individuals are not eligible for nonprofit status.
The IRS has designated a particular group of not-for-profit organizations that are eligible for 501(c) status. This group of nonprofit includes businesses involved in charitable works, public safety testing, creating international and national amateur sports competitions and preventing cruelty to animals or children. Other organizations that may also qualify include religious, scientific, educational, public service and literary nonprofit organizations.
The three categories of nonprofit organizations that 501(c) businesses fall into are public charities, private operating foundations, and private foundations. Public charities receive the bulk of their revenue from the public, corporate sponsors, the government and foundations. According to IRS requirements, a third or more of a public charity’s income must be sourced from a base of public patrons and donors, including individuals, other charities and companies. Public charities also use a board of directors made up of people unrelated to the organization who operate the nonprofit in the best interest of the public. Examples of public charities include churches, clinics, schools, homeless shelters, educational programs, and food banks.
Private foundations generally do not operate publicly active programs. Instead, these nonprofit receive funding from single private donors or groups of donors. The revenue these organizations generate is distributed in the form of grant money to public charities. Private foundations also have a board of directors, but unlike public charities, this board may contain family members and business associates.
Private operating foundations may have active public programs similar to the programs run by public charities, or they may have a business structure similar to a foundation. Often they are combinations of both types of organizations and are used by wealthy individuals who wish to combine the ability to give grant money to other charities with running a specific type of program for the benefit of the public.
The IRS enforces strict rules for the operation and governance of 501c organizations. A 501(c) may engage in limited legislative and lobbying activities, but they may not endorse a candidate for any public office or aid any type of political campaign.
No one involved in the organization may benefit from the distribution of grants or assets at the time the nonprofit closes, nor may a director, member or officer of the corporation or private individual benefit from the nonprofit’s operation. Once an organization is designated a nonprofit, it cannot change its status and become a for-profit organization.
Application for 501(c) status begins by visiting the IRS website to determine whether the organization qualifies for the exemption and what kind of exemption it may be eligible for. An organization that meets the basic requirements listed in IRS Code Section 501(c) are exempt from paying federal income taxes. Organizations must then fulfill state requirements for incorporating as a not-for-profit business before applying with the IRS for exempt status. The application requires the completion of Form 1023 and the payment of a fee based on annual gross receipts.
You can read about Form 1023 on IRS
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