501c3 and 501c6 are two of the common types of tax exempt organizations. If you are planning to start a nonprofit, you might be considering whether to organize as a c3 or c6.

While 501c3 and 501c6 are similar in case of tax exemption, there are a few key differences between them. In this article we are going to explain some of these differences.

501c3 Organization

Section 501c3 of the US Internal Revenue Code allows nonprofit organizations which are considered public charities, private foundations or private operating foundations to be exempt from federal taxes. This can also include corporations, trusts and community chests.

Nonprofits which are organized for religious, scientific, educational or literary purposes, testing for public safety, fostering national or international sports and prevention of cruelty to animals and children are considered as ‘charitable’.

501c6 Organization

A 501c6 organization promotes the common business interests of their members without the goal of making a profit. No individuals or shareholders should benefit from the net earnings of the organization. These organizations are exempt from federal taxes if they qualify as 501c6 under the US Internal Revenue Code.

They include business leagues, chambers of commerce, trade associations, real estate boards, professional associations and professional football leagues.

Key Differences Between 501c3 And 501c6

Given below are some differences between 501c3 and 501c6 in some categories.

Purpose

The purposes listed under section 501c3 of the Internal Revenue Code are religious, charitable, scientific, testing for public safety, literary or education purposes, to foster national or international amateur sports or the prevention of cruelty to animals and children. A nonprofit organization will receive exemption from federal tax only if it engages in activities which accomplish any of the purposes mentioned in section 501c3. They are not allowed to pursue extra activities which do not play a role in achieving the specified purpose.

The purpose of the 501c6 organization is to promote common business interests of their members without the goal of making a profit. Their actions should be directed to the improvement of business conditions of one or more lines of business rather than the performance of particular services for individuals.

In contrast to 501c3 organizations, 501c6 organizations are allowed to engage in extra activities which are not in furtherance of their exempt purpose. However their primary activities must be directed towards furthering their exempt purpose.

Fundraising

Majority of 501c3 organizations are allowed to receive deductible charitable contributions. Given below are the following requirements for deductibility of contributions,

  • The organization must be operated and created in the United States and must be subject to its law.
  • The organization must be operated for the specific purposes mentioned in the tax exempt section.
  • Private shareholders or individuals should not benefit from the net earnings of the organization.
  • Must not participate in any political campaigns on the behalf of any candidate for public office.
  • The contributions should not be earmarked for lobbying.

In the case of 501c6 organizations, contributions are not deductible as charitable contributions. Payments can be deductible to members as a necessary business expense in conduct of the member’s business.

Lobbying

501c3 organizations can engage in lobbying as long as their primary activities are aimed at furthering their exempt purpose. In other words, lobbying activities must be insubstantial in relation to their overall activities. 501c3 private foundations are generally not allowed to participate in lobbying but there might be exceptions. Rules for lobbying are different for 501 h – electing public charities.

501c6 organizations are generally allowed to engage in lobbying in furtherance of their exempt purposes. However they might be required to pay a proxy tax or notify it’s members about the percentage of non deductible dues which are used for lobbying.

Political Campaigns

501c3 organizations are strictly prohibited from participating in political campaign intervention activities.

501c6 organizations can participate in political campaign intervention activities as long as it doesn’t affect their primary activities.

Conclusion

Although 501c3 and 501c6 organizations are similar in some cases, they do have some differences. 501c3 organizations have some advantages like eligibility to receive tax deductible charitable contributions and grants from a wide variety of sources.