Through the Internal Revenue Service (IRS), the U.S. Treasury regulates what is called the Internal Revenue Code (IRC). The IRC is the governing law of tax regulation and section 501(c)(3) is a portion of the code that outlines tax information regarding nonprofit organizations.
There are benefits and drawbacks of forming a 501c3. They’re typically created to serve charitable, educational, religious, or other community-based purposes.
Read on to learn about 501c3 organizations. We’ll also explore how board management software helps nonprofits streamline operations, enhance collaboration, and improve security and compliance.
What is 501c3?
A 501c3 is a nonprofit organization that is tax-exempt and donors can deduct their contributions from their taxable income. 501c3 organizations are typically organized and operated exclusively for religious, charitable, scientific, or educational purposes. To qualify for the 501(c)(3) tax-exempt status, an organization must meet certain requirements and adhere to specific regulations set by the IRS.
How to Qualify for 501c3 Status
No Private Inurement
Money that’s raised or donated to a nonprofit organization can have no private inurement. This means no members can use the organization’s funds for personal interests. Rather, all earnings must be used solely for its charitable cause.
Examples of private inurement include using charitable funds to book a lavish work trip, or offering goods for a fee but allowing board members to receive them at no cost. Violation of these regulations can result in high tax fines and revocation of their non-exempt status.
Political Activity Limitations
When it comes to voicing opinions or financially supporting political campaigns, 501c3 organizations are forbidden to participate. This goes for local, state, and federal elections.
Additionally, donors have the right to understand how their funds are allocated by the nonprofit. Individual members of the nonprofit can speak about their political beliefs, so long as they don’t claim to represent the organization while doing so.
No Excessive Compensation
Similar to private inurements, excessive compensation occurs when a member of the organization receives an overly inflated salary. For example, if a board member receives a salary far beyond the standard for a similar position in other 501c3 organizations, they could be forced to return the excess funds back to the foundation.
Individuals who qualify as “members” include anyone on the board of directors, chief executives, presidents, treasurers, financial officers, as well as all family members of people holding these positions.
Maintenance of Records
Retaining documents is a critical part of any business. Once your organization complies with IRS regulations, you must implement an organized system for record-keeping. Vital documents may include financial reports, operational records, and meeting minutes. In addition to retaining documentation, 501c3s are required to undergo annual reporting using Form 990 with the IRS.
How to Start a 501c3
It’s important to consult with attorneys, accountants, and other professionals who specialize in nonprofits to guide you through the formation process. The following steps summarize how to apply for a 501c3 status.
Define Your Mission and Purpose
Your organization should have a specific purpose that benefits the public. After you determine your purpose, write a mission statement and establish bylaws. These should outline the classification of the organization, as well as additional context that covers aspirations and growth goals.
Incorporate Your Nonprofit
To achieve official nonprofit status, register the organization in your state and apply for an Employer Identification Number (EIN). This process includes forming a legal entity that’s separate from its members to ensure any asset-liability of the individuals and organization remain separate.
Appoint a Board of Directors
Nonprofits are required to appoint a board of directors. While laws vary state to state, the IRS recommends at least three people serve on the board. Like any business, a nonprofit needs representatives who contribute specific skills and can prevent 501c3 violations.
Apply for a 501c3 Tax-Exempt Status
The IRS provides Form 1023 or Form 1023-EZ for nonprofits to apply for their 501c3 tax-exempt status. You must include detailed information about your organization, its mission, activities, and financial structure. Applications also come with a fee that depends on the size and projected income of the nonprofit.
Comply with Ongoing Requirements
In addition to proper recordkeeping and compliance with state and federal laws, it’s important to note that nonprofits are required to submit their financial records. Because nonprofits are funded by generous donors, they have the right to know how their funds are spent. In fact, any member of the public can access the financial records of nonprofits.
The size of 501c3 organizations can vary from small to large. What successful nonprofits have in common is their strong dedication to humanitarian services, wide-reaching impact, transparency, and accountability. Examples of 501c3 organizations include the American Red Cross, World Wildlife Fund, and Habitat for Humanity International.
OnBoard Powers Effective Nonprofits
For effective nonprofit governance of 501(c)(3) organizations, board members must promote transparency and accountability.
OnBoard’s cloud-based board management software addresses the unique needs of 501c3 organizations, from seamless document storage to managing financial reporting and grant proposals. OnBoard’s meeting management software supports in-person and virtual meetings, making it versatile for today’s changing work environment.
Some of the core OnBoard features include:
- Agenda management: OnBoard simplifies agenda creation and distribution, ensuring all necessary topics are covered in meetings.
- Document management: The platform allows for secure storage and easy retrieval of crucial documents, such as financial reports, strategic plans, and meeting minutes.
- Voting and resolution tracking: OnBoard facilitates electronic voting and tracking of resolutions, making decision-making processes smoother and more transparent.
Download our free board meeting template agenda to bring structure, clarity, and efficiency to board meetings.
Frequently Asked Questions (FAQ)
What are the Rules for 501c3 Spending?
501c3 organizations must operate transparently, spend only on mission-related items, and may not participate in private inurement, excessive compensation, or political involvement.
How Does a 501c3 Make Money?
501c3s earn money via donations, grants, fundraising, membership dues, investments, and other public support.
Does a 501c3 Status Expire?
No, so long as the organization complies with state and federal rules and regulations.
About The Author
- Gina Guy is an implementation consultant who specializes in working with nonprofit organizations get the most from their board meetings. She loves helping customers ease their workloads through their use of OnBoard. A Purdue University graduate, Gina enjoys refinishing furniture, running, kayaking, and traveling in her spare time. She lives in Monticello, Indiana, with her husband.
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