Legal Status for Organizations

            A common question asked by people starting up new organizations, is what kind of legal status should they seek for their organization … 501 (c) (3), 501 (c) (4), 527, PAC or what?

            Before rushing out and spending hundreds or thousands of dollars on lawyers, accountants and filing fees, and encumbering your organization with the restrictions and reporting requirements associated with the types of legal status mentioned above, you may wish to consider this little bit of law right here:

            Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech,

            or of the press; or the right of the people peaceably to assembly, and to petition the Government for a redress of grievances.

            The simple fact is that the overwhelming majority of “associations” of people with their family, friends and neighbors do not require the government’s permission to exist and function.  You and your neighbors can get together at any time to complain about a pothole, “lobby” your elected official, talk to the media about it, pass the hat to collect money, post signs and “campaign” to get the pothole filled or the elected official replaced with relative impugnity.  Naturally the government bureaucrats want you to think you can’t do anything without their permission.  And their forms.  And their fees.  And it is no more true than your little girl having to incorporate and get a street vendor’s license and restaurant permit before she can set up a lemonade stand and sell lemonade in front of your house.  We are still the land of the free.  Lest we forget.

           So before asking what kind of formal status to seek, define what the organization is intended to do, and whether or not you even need to incorporate.  Because you must incorporate at the state level, before you are eligible to apply to the IRS for approval as a 501 (c) (3), 501 (c) (4), or 527 organization.  And you must be incorporated at the state level as a non-profit corporation first, in order to qualify for any of the above statuses at the federal level.

            Following is a summary of the characteristics of each of the different types of “IRS approved” organizations.

            501(c)3s are defined by the IRS as charitable, religious, scientific or educational organizations and mostly consist of public or private foundations such as Red Cross or Habitat for Humanity. The money they use for media is generally to educate viewers about issues or an organization’s mission, with or without a call to action at the end, such as “join us” or “donate now”. Although they can heighten public awareness about certain issues, they aren’t allowed to show political affiliation or urge people to vote for or against a specific candidate. They can only use a small percentage of funds to lobby. They can issue a “Tell Congress you’re fed up” statement, as it is not specific to any candidate, or release a non-partisan report on a politically charged issue such as global warming, but they must stop short of advocating for or against a particular candidate.  501(c3)s are allowed to engage in "public education." Public education can look similar to political advocacy, except for the fact that it is not specifically endorsing a candidate and / or not specifically telling a voter how to vote on a particular issue.

             Many (c)3s don’t go as far as they can because they worry that if they violate the restrictions, they will lose their status.  The definitive feature of 501 (c) (3) organizations is that contributions to them are tax-deductible.

             501 (c) (4)organizations are described in the IRS code as non-profits that promote social welfare; but unlike a (c)3, a 501(c)4 organization can lobby for specific policy change.  501 (c) (4) are “advocacy” organizations, as opposed to “education” organizations.  Here is an example of the difference: A 501(c)3 can tell you about the flaws of a particular piece of legislation, but a c4 can ask you to sign a petition to Congress to oppose it and spend a significant amount of their budget to have it defeated.  However, c4 money cannot be used in election campaigns on behalf of or against any candidates.

             A 501 (c) (4) is tax exempt (pays no taxes on its receipts), but contributions are not tax deductible for the donors.

            527 groups (or 527 funds) can influence the nomination, election, appointment or defeat of candidates for public office. 527 money can be used on behalf of or against candidates; for instance, Political Action Committees (PACs) are 527s.  A 527 is NOT allowed to coordinate with a specific election campaign. Rather, it must be an “interest group” who is advocating on issues or mobilizing voters.

             A 527 is tax exempt but not tax deductible.

             Political Action Committees (PAC)’s are formed for the purpose of electing or defeating a candidate or ballot issue.  They are governed not by the IRS, but by local boards of election or the Federal Election Commission (rarely both).  Obviously, choose the local if you can; they will be much more helpful, and economical.

             PAC’s are tax exempt but not tax deductible.  They usually cease to exist shortly after the election.

Many organizations have filed with more than one status and must accordingly maintain a separate set of financial “books” for each.    

If this simple overview is not sufficient to your needs, then perhaps you do need to consult an attorney or an accountant after all.