What is a 501c3 Corporation? Basics You Need to Know

We get it. Well, incorporating your concepts into a nonprofit organization can be a significant step toward achieving your objectives. After that, you won't have to pay income tax. Even you can use your 501(c)(3) status for charitable purposes. It will help you to create a better world and you will get more credibility. Additionally, you can raise even more funds for your objectives.

You may be wondering how to establish a nonprofit organization, right? Additionally, there might be a question that arises in your mind, like “What is a 501c3?” 

In this article, we explore the basics of 501c3 tax-exempt non-profit organizations. Let’s get started.

What is 501c3?

Have you ever thought of establishing a non-profit organization in order to give back to your community? Perhaps you have a charitable cause in mind, like exploration for mental imbalance or aiding the destitute. You have literally been waiting for a long time to have a similar sort of effect through your own not-for-profit.

No matter what is your vision, always focus to provide your not-for-profit association a triumph in the same way as other businesses. Always remember that your nonprofit organization is subjected to report to the state and federal agencies. This is the place where the 501c3 status of your nonprofit organization comes into play.

So, the question is “ What is a 501c3?” and "How to apply for 501(c)(3) status?”. Don’t worry! We are here to answer your queries.

The U.S. Internal Revenue Code (IRC)'s Section 501(c)(3) is a specific tax category for nonprofit organizations. The organization is not only exempt from paying federal taxes because of this status, but it is also able to receive grants from government agencies and foundations.

The 501(c)(3) is explicitly applicable to 27 kinds of charitable associations that have tax immunity. It basically exists for magnanimous, instructive, scholarly, or logical purposes, public wellbeing, cultivating public or global sports contests, or forestalling savagery to kids or creatures.

According to the National Center for Charitable Statistics (NCCS), there are more than 1.54 million registered nonprofit organizations in the United States.

Types of 501c3 Organization

The majority of the nonprofit organizations that may be eligible for 501c3 status fall into the following three categories:

Private Foundations: Charitable associations that give grants to public causes and own more than half of their assets.

Public Charities: The non-profit organizations that always serve different public purposes and benefit the whole community.

Social Welfare Organizations: Organizations that help people to deal with poverty-related issues, work for the betterment of low-income neighborhoods, help disadvantaged individuals to get employment, etc.

What Are the Advantages and Disadvantages of 501c3 Organization?

The designated organizations and the people they serve stand to gain greatly from the 501(c)(3) status. Let’s check out some of its common benefits:

  • Eligible for receiving grants from the government, private foundations, and other charitable organizations.
  • Exemption from paying all federal, state, and local income taxes.
  • Protection from individual lawsuits and other claims by the company.
  • Increased contributions for the purpose of tax deductions for individual donors.
  • Receive discounts and free advertising through public service announcements.
  • Avail food and supplies from other nonprofit organizations.

Forming a 501c3 non-profit organization also has some drawbacks which include:

  • Once your association gets the 501c3 status, it no longer belongs to you. It rather becomes a public enthusiastic organization.
  • It's possible that staff, officers, and directors won't be able to get paid what they deserve for their contribution to the company.
  • Strict restrictions on activities that are not related to the goals of the charity.
  • Close oversight by the Interior Income Administration with a chance of huge penalties as well as taxes.
  • When the organization is dissolved, its assets must be given to another charitable organization.

How to Get Started with Your 501c3 Non-profit Organization?

Well, starting a non-profit business must begin with a name, just like other businesses. Consider a name for your organization first. After that, check it with your secretary of State’s Office and ensure no one else has claimed the name. Once you get the assurance, it’s time to register and pay your State’s filing fee.

1. Establish Your Non-Profit Corporation:

A 501(c)(3) organization must be incorporated as a trust, corporation, or association by the IRS. So, it will be your initial step to incorporate your company as a nonprofit organization.
The initial paperwork that a nonprofit must submit is the same as that of a corporation. But there is one exception: you should have a mission statement of a nonprofit organization that clearly defines your company. Your nonprofit or tax-exempt status may be revoked if you deviate from the mission or go beyond its scope.
After you've written your mission statement, do proper research to find the best location to incorporate your nonprofit business. Nonprofit corporations are subject to a variety of costs, tax regulations, and laws in each state. So, you are required to register the corporation in the state in which the business will be conducted the most.

2. File for 501c3 Tax Exemption Status:

The next step is to apply to the IRS for a 501(c)(3) tax exemption. If you want to get the 501c3 tax exempted status for your organization, you should file Structure 1023 and Structure 990 forms with the IRS.
Form 1023 can be a little bit confusing. So, before proceeding you should consult a tax attorney. Or you can go through the comprehensive list of frequently asked questions available on the IRS website.

3. Designate The Board of Directors:

A board of directors must be appointed by a corporation. The members of a nonprofit organization's board of directors oversee the entire operations in accordance with its bylaws.
Their main responsibilities are: Organizing the annual corporate meeting, ensuring that the board minutes are recorded correctly, and supervising the organization's activities.

Final Thoughts

So, it is clear that if you want to keep your tax-exempt status as a nonprofit, you should follow the below-mentioned points:

  • Dividends cannot be given.
  • To maintain tax-exempt status, you must abide by intricate state and federal filing requirements.
  • You cannot participate in certain activities, such as supporting or opposing a candidate in any political campaign.

Most importantly, you are illegal to coordinate your not-for-profit to help private interests. But you are permitted to pay staff, corporate officials, and yourself a sensible compensation to run the association.

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