20 Mar 2014 c3 Versus c6 – a Basic Primer
When people think of nonprofits they generally think of charitable organizations which are organized to help out society as a whole. The IRS, which grants corporations non-profit status indicates the following as the reason an organization can become a 501(c)3 – for any group “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” Where as a 501(c)6 is for “business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues” (whether or not administering a pension fund for football players), *There is an interesting history of why the NFL is specifically named in the provision versus other sports – but I will leave that for the sports writers out there.
Here at Jaffe Management we work with a combination of both (c)6 and (c)3 organizations. Most of the trade and professional membership organizations out there exist to serve the industry at large and also its members fall under the (c)6 group. However some coalitions and membership groups which are purely educational in nature do fall into the (c)3 category.
So once you figure out what your organization is – what is the same and what are the differences between the two? They are the same in that both (c)3 and (c)6 organizations are there to foster a mission, have their money reinvested into the organization rather than provide dividends, and neither pay corporate taxes. Where they differ is that (c)6 groups pay sales tax and the money given to them is not considered a charitable tax donation. However many people and companies will write their dues off as a professional expense anyway. Groups with the (c)3 designation do not pay sales tax and the money given to them can be used as a tax donation (one of the reasons you probably get so many end of the year solicitations on December 31st).
Another big difference is lobbying. Groups that have 501(c)6 designation can lobby provided that it falls within their mission. Groups that are designated 501(c)3 can lobby as well but with clearly defined limits and restrictions (they cannot give money to political campaigns for example). You will often see these (c)3 groups have separate lobbying arms (called a 501(c)4) to take care of their lobbying work.
While this post is intended to give a general overview, there are a lot of important details that can be found on the IRS website and when delving into tax issues, an accountant is definitely a great resource.