What 501(c) is right for your business?

When people mention tax-exempt organizations, they are typically referring to 501(c)3 exempt groups. 501(c)3s are, by a large margin, the most popular type of tax-exempt entity. 74% of all 501(c)s are 501(c)3 - a qualification reserved for corporations and foundations that are religious, educational, charitable, or scientific in nature. Donations to 501(c)3 groups are tax deductible, and 501(c)3s are largely prohibited from becoming involved in politics. However, what few people realize is that there are actually 28 other types of organizations that can qualify for tax-exempt 501(c) status, though only (c)3 and (c)19 groups allow for tax-deductible donations. If you are thinking about forming your own tax-exempt organization or charity, be sure to look at every other 501(c) exemption. Many of the classifications are a bit obscure, but these five tax-exemption types after 501(c)3 are the most popular and will cover the most groups.

501(c)5: Labor, Agricultural and Horticultural Organizations

Though there aren't many 501(c)5 organizations registered with the IRS, labor, agricultural, and horticultural organizations boast some of the largest gross receipts and assets. Organizations that qualify for 501(c)5 status are tasked with bettering the lives of the laborers and farmers they represent, and as such must work for the mutual interest of all members, rather than in the interest of a select few. There are also some famous, and even some infamous, groups with 501(c)5 exemptions - Unite Here, the UAW, and the International Brotherhood of Teamsters all qualify as 501(c)5 organizations.

501(c)7: Social and Recreational Clubs

Social and Recreational clubs squeak into fourth place by only a few hundred entities. 501(c)7's are organizations that are created for pleasure or recreation, and thus do not seek out profit. Most of the time, country clubs, college fraternities, and larger university societies seek 501(c)7 exemption. Again, the central purpose of the qualifying club has to be to benefit its members in some way. Since most of these clubs are member-funded, tax-exemption is granted to allow members the freedom to join together to seek out recreational and social opportunities.

501(c)8: Fraternal Beneficiary Societies and Associations

Fraternal societies and associations that operate under a lodge or chapter system and offer a system of support to their members can qualify for 501(c)8 exemption. These groups are effectively run off of member fees and donations, and in return they provide insurance and other benefits to their members, the most common being sickness, accident, or death benefits. These benefits, however, can only be made available to members and their dependents - otherwise, the group's tax-exempt status won't be recognized.

501(c)6: Business Leagues, Chambers of Commerce, Real Estate Boards, etc.

501(c)6 status can be a bit tricky because the organizations it exempts are made up of profit-generating entities. 501(c)6 organizations are associations, leagues, and boards made up of businesses or business owners that come together to pursue a common interest. That interest, however, cannot be profit-based. They have to prove that their purpose is the betterment of a particular trade or their wider community, and must act to further the interests of their members. Interestingly, the IRS make a point to include professional football leagues as 501(c)6 eligible organizations - the NFL actually has a 501(c)6 exemption!

501(c)4: Civic Leagues, Social Welfare Organizations, and Local Associations of Employees

501(c)4 is the most popular exemption after 501(c)3, and is also one of the most controversial exemptions because 501(c)4s can lobby for legislation. Now, 501(c)4s have to work to promote social welfare, but different groups have different ideas as to what sort of rules benefit society. 'Action' organizations - the corporations and foundations that lobby for the legislation that benefits their wider mission - typically qualify for a 501(c)4 exemption, and do not have to list their donors publicly. However, before 501(c)4s are written off completely, it should pointed out that not all 501(c)4 exempt groups lobby. Volunteer fire stations, rotary clubs, and Kiwanis all qualify for 501(c)4 exemptions, and are largely apolitical.

Tax exemption is a touchy subject. If you are considering forming your own tax-exempt organization, remember that the IRS will be keeping a very close eye on you. Research all of your options, and speak with an attorney or other professional. 501(c) exemptions can be a tad confusing, but if you know exactly what type of exemption your group qualifies for, and what the state and federal tax agencies expect from you, running your 501(c) exempt group will be a lot easier.

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