IRS Classifications Available for Setting Up a Charity Organization

When setting up a nonprofit in the United States, it’s necessary to be aware of the different IRS classifications available for your organization. In the interest of transparency, and because your nonprofit may be exempt from paying federal taxes, you’ll be required to report your activities to the IRS and follow any applicable registration laws.

Fundraising registration requirements can vary depending on the type and classification of your nonprofit, the state-specific regulations where you choose to solicit funds, and the method of fundraising used. Fines and penalties for non-compliance can be significant, so it’s crucial for you to understand and fulfill all of the requirements related to fundraising activities. 

Even before choosing between third-party state charitable registration services and handling fundraising registration responsibilities in-house, it’s important to have a basic understanding of the most common types of nonprofit classifications, such as 501(c)(3), 501(c)(4), and 501(c)(6). That’s because fundraising rules and registration requirements can vary among the different classifications, and you’ll want to know which requirements may apply to your organization. 

IRS Classification of Nonprofits

The Internal Revenue Service (IRS) classifies nonprofit organizations under Section 501(c) of the Internal Revenue Code. Most people are familiar with 501(c)(3) organizations, however, there are a total of 29 different classifications, each with their specific purposes. Here are some of the other commonly recognized sections:

501(c)(1): These organizations are corporations formed by Congress which are exempt from taxation. They include federal credit unions and other national entities.

501(c)(4): This classification covers civic leagues and social welfare organizations. They operate for the promotion of social welfare and their net earnings are devoted only to charitable, educational, or recreational purposes.

501(c)(5): These organizations focus on the betterment of labor, agriculture, and horticulture, including the individuals working within these industries and the products they produce.

501(c)(6): This type of nonprofit includes organizations that seek to improve business conditions, such as business leagues, chambers of commerce, and real estate boards.

501(c)(7): This class includes clubs that are organized for pleasure, recreation, and other nonprofitable purposes. Membership is often limited.

501(c)(8): This section is for fraternal beneficiary societies and associations that operate under the lodge system to offer mutual aid for the benefit of its members.

501(c)(10): These organizations include domestic fraternal societies and associations. They operate under the lodge system exclusively for religious, charitable, scientific, literary, educational, and fraternal purposes.

Among those listed above, sections 501(c)(3), 501(c)(4), 501(c)(5), and 501(c)(6), are the most common types, with 501(c)(3) organizations leading the pack. Because of this, it makes sense to take a closer look at the definitions and requirements of each. For more information on other types of nonprofits, visit the IRS webpage on types of tax-exempt organizations. 

What are 501(c)(3) Organizations?

501(c)(3) organizations are nonprofit organizations that are established for purposes that are beneficial to the public. They include religious, educational, scientific, animal welfare, and human services organizations, among others. The majority of nonprofits fall under this category.

Similar to other nonprofits covered under 501(c), these organizations are exempt from paying federal income tax. In addition, donations made to them are typically tax-deductible for donors. The organizations may be exempt from paying state and local taxes as well.

What are 501(c)(4) Organizations?

501(c)(4) organizations are similar to those classified under 501(c)(3), however, they are primarily involved in promoting social welfare causes. Definitions of social welfare may encompass a broad range of activities, but these organizations are commonly linked to lobbying activities and issues related to advocacy and political engagement. Due to their involvement in political activities, they must follow IRS regulations that limit how much political campaigning they can do and restrict the use of funds for the personal benefit of its members. Another key differentiator is that unlike 501(c)(3) organizations, donations to 501(c)(4) organizations are not tax-deductible.

What are 501(c)(5) Organizations?

A 501(c)(5) organization is classified by the IRS as a labor, agricultural, or horticultural organization. These organizations focus on bettering the conditions of persons engaged in the pursuits of labor, agriculture, or horticulture, improving the grade of their products, and developing a higher degree of efficiency in their respective occupations.

With regard to taxes and political involvement, donations made to 501(c)(5) organizations are not tax-deductible for the donor in most cases. Lobbying activities are also unrestricted as long as they pertain to the common business interests of the organization’s members.

What are 501(c)(6) Organizations?

501(c)(6) organizations primarily strive to promote the common business interests of their members and improve business conditions in their industry. They must not be organized for profit or engaged in activities typically carried out by for-profit businesses. These organizations typically include business leagues, chambers of commerce, real estate boards, and boards of trade. 

501(c)(6) organizations can engage in some political activities, as long as politics is not the organization’s main purpose. Unlike 501(c)(3) organizations, contributions to 501(c)(6) organizations are typically not deductible as charitable donations for federal income tax purposes. However, they may be deductible as trade or business expenses if they are ordinary and necessary in the conduct of the taxpayer’s business and given with an expectation of comparable financial return in line with the size of the donation. 

Fundraising Registration Requirements for 501(c) Nonprofit Organizations

Fundraising registration requirements can vary significantly based on state laws as well as the operational nature of a nonprofit organization. There are currently 41 states plus the District of Columbia that require charitable solicitation registration, and if you intend to solicit funds for a charitable purpose, you’ll likely have to register with the state’s Attorney General’s office or Department of State in each pertaining jurisdiction before you can start soliciting funds. 

State fundraising registration requirements most commonly apply to 501(c)(3) organizations, but the same requirements may also exist for other types of 501(c) organizations, such as 501(c)(4)s and 501(c)(6)s when they are also soliciting for charitable purposes, but it depends on local state laws. Understanding nuanced, differing, and frequently changing state laws is one of the biggest challenges of fundraising in multiple states, but it’s essential in order to maintain compliance.

As a general rule, 501(c)(3) organizations have to register in the state where they solicit (except for in the nine states that currently don’t require it.) 501(c)(4)s typically have to register as a “social welfare and advocacy” organization in order to qualify them as having a charitable mission. In rare instances, a purely legislative or political organization may qualify, but they would likely need to defend their limited mission statement. For 501(c)(6) nonprofits, they are generally exempt from registration, however, it often differs from state to state and is subjective to the circumstances of the organization.

Get Help With Navigating Fundraising Registration Requirements

Fundraising rules and registration requirements can vary among 501(c)(3), 501(c)(4), and 501(c)(6) organizations, as well as among other nonprofit classifications. The most common points of differentiation include the necessity to register at the state level, limitations on political campaigning and lobbying, and whether donations are tax-deductible. Generally, 501(c)(3) organizations have the strictest requirements and highest level of oversight due to their charitable nature and the tax-deductibility of donations.
If you would like help with registering your nonprofit so you can raise funds legally, no matter what your IRS classification is, Affinity Fundraising Registration is here for you! With several decades of experience, an expansive database of resources, and multiple service levels to choose from, we can provide the support you need to achieve and maintain compliance. Contact us today to learn more or to request a free estimate.