Q&A #75 – Are there advantages to 501(c)(4) status compared to 501(c)(6) status?
Question: I am in the process of forming a nonprofit organization that will mainly engage in advocacy and lobbying on certain public policy issues. I understand that 501(c)(3) status is not a good fit due to the limits on lobbying activities, but I am not sure whether the organization should be structured as a 501(c)(4) organization or 501(c)(6) organization. Are there any advantages to 501(c)(4) status?
Answer: Both 501(c)(4) and 501(c)(6) organizations are permitted to engage in unlimited amounts of lobbying so long as the lobbying is consistent with the organization’s tax-exempt purposes. The main advantage of 501(c)(4) status as compared to 501(c)(6) status is that there is more flexibility with regard to the organization’s governance structure. However, there are some downsides that should also be considered.
501(c)(4) organizations must be operated exclusively for the promotion of social welfare, which generally means “promoting in some way the common good and general welfare of the people of the community,” such as by “bringing about civic betterments and social improvements” and engaging in charitable and educational activities. Treas. Reg. § 1.501(c)(4)-1. This category of tax-exemption is generally broad enough to encompass a wide range of advocacy and lobbying activities.
501(c)(6) organizations, in contrast, are formed to promote the common business interests of their members by improving business conditions in one or more lines of business (as distinguished from providing particular services to members or engaging in a regular business of a kind ordinarily carried on for profit) Treas. Reg. § 1.501(c)(6)-1.
While these tax-exempt purposes are distinct, some organizations that mainly engage in advocacy and lobbying could potentially qualify for either 501(c)(4) or 501(c)(6) status, depending on whether the organization’s policy goals have a broad impact on the common good and general welfare of the public rather than a narrower set of business interests.
For organizations whose mission could fit under either category, the main difference relates to the organization’s governance structure, as 501(c)(6) organizations are subject to more strict requirements. Under IRS rules, 501(c)(6) organizations must be structured as “membership” organizations and have a “meaningful extent of membership support.” This generally means that members must pay dues and have significant involvement in the organization’s governance and activities (typically by voting to elect the Board of Directors). Further, a 501(c)(6) organization’s mission must be sufficiently broad so as not to focus only on one segment of a line of business. While 501(c)(6) organizations may have substantial non-member revenue, member dues must always be at a meaningful level (the IRS has not clarified the specific amount of member dues that will satisfy this rule).
The main advantage of 501(c)(4) status is that these governance restrictions do not apply. A 501(c)(4) organization may choose to be Board-governed (where Directors are elected/appointed by the Board itself) rather than member-governed (where Directors are elected by the members). 501(c)(4) organizations are permitted but not required to have a membership structure, and generally have more flexibility with regard to the selection of Directors and/or members. Similarly, 501(c)(4) organizations are permitted but not required to maintain a meaningful level of membership support through dues.
Planning Tip – When forming a new organization and determining which tax-exempt status is the best fit, remember to plan for the long term. Think carefully about the organization’s goals for its activities, revenue, and Board composition over the next 5 or even 10 years. Give special attention to how the future Board will be recruited and selected once the organization matures past the start-up period (this could take years) and the second generation of Board members takes office. The path you choose in the beginning will impact your programmatic and governance options far into the future.
Be aware that that there are some downsides to 501(c)(4) status. Most notably, 501(c)(4) organizations are generally considered to be subject to state charitable solicitation registration laws just like 501(c)(3) organizations. This often includes a requirement to provide audited financial statements as part of the registration process once the organization reaches a certain threshold of gross revenue (this threshold varies by state). This additional compliance burden generally does not apply to 501(c)(6) organizations.
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Q&A #30 – Can a 501(c)(3) organization engage in advocacy related to state ballot initiatives?
