What is a 501(c)3?

Most people would agree that charitable organizations are a necessary part of human society. Where governments and private industry fails to provide for certain segments of society, charities can step in to fill the void. Although anyone can be involved in a charity, there is a process that must be followed in forming a charitable organization. You cannot just decide to provide support to a cause and start asking for money.

A 501(c)3 is an important factor in the formation and foundation of any charitable organization. In this post, you'll learn some of the basic information about 501(c)3 organizations, including exemption requirements, the process of obtaining this designation, and the different types of organizations that fall under this code.

Definition

According to the Foundation Group, an organization empowering nonprofits for two decades, a 501(c)3 organization identifies a "particular nonprofit organization that has been approved by the Internal Revenue Service as a tax-exempt, charitable organization." The term "charitable" is often broadly applied to organizations, but in many cases it covers those charities established for purposes ranging from religious and educational to scientific, literary, or otherwise charitable.

Exemption Requirements

Simply forming a charitable organization, whether public or private, does not guarantee a grant of 501(c)3 status. In order to earn this status, an organization must meet a number of exemption requirements set forth by the Internal Revenue Service. Among those exemption requirements are the following:

·         Group must be organized and operated exclusively for the exempt purpose set forth under section 501(c)3 codes of the IRS, and none of its earnings may inure to private shareholders or individuals.

·         The group cannot be an action organization, meaning it may not attempt to influence legislation.

·         It may not participate in any campaign activity, either for or against a particular political candidate.

·         The organization must not be organized for the benefit of a private individual, nor can any amount of its earnings inure to the benefit of a private individual.  

How to Obtain 501(c)3 Status

Once a charitable organization has been formed, it is time to obtain status as a 501(c)3 entity. The process starts with the submission of an application to the Internal Revenue Service for recognition as a tax exempt group. Your group will need to fill out the 28-page Form 1023. All required attachments, schedules, and other materials are required in order for the form to be considered by the IRS upon receipt.

The IRS will thoroughly investigate the organization's governing structure, purpose, and planned programs. Additionally, the IRS is looking to see that an organization is formed specifically for the purpose of charitable actions and that its programs support those goals.

Different Types of Organizations

There are three types of 501(c)3 organizations:

·         Public charities

·         Private foundations

·         Private operating foundations

A public charity is generally considered one which receives a substantial portion of its revenue from the public or government. More specifically, public charities must receive at least 1/3 of donated revenue from a broad base of public support. Common public charities include churches, animal welfare agencies, and educational organizations.

Private foundations, on the other hand, can draw revenue from a small number of donors and, in some cases, even from one individual. A family foundation, such as the Bill & Melinda Gates Foundation, is the perfect example of a private foundation that draws revenue and support from one individual.

Finally, a private operating foundation has active programs similar to that of a public charity, but also has attributes similar to those of a private foundation. These types of 501(c)3 organizations are governed closely by the government and other authorities, but have greater donation deductibility.

There is much more to learn about the complexity of 501(c)3 status. The IRS and various private entities offer guidance and support to those seeking exemption status under the current IRS code. Contact us at Indian River Financial for more information.