Nonprofit Insurance Program

501 C 3 Organizations; What Rights do They have?

By Alexa Connelly
September 17, 2013

If you are an officer or director of a nonprofit organization you are probably familiar with 501c3 tax-exempt status. If you have not yet applied to the Internal Revenue Service, you might be wondering just what are the rights and responsibilities, the benefits and disadvantages of being a 501c3 organization.

A nonprofit corporation may apply to the IRS for 501c3 status if their work or activity falls into one of the following categories: religious, educational, charitable, scientific, literary, testing for public safety, fostering national or international amateur sports competition, prevention of cruelty to children or animals. There are two major benefits of 501c3 status:

1)  exemption from federal corporate taxation and, in some localities, exemption from or reduction in state and local corporate taxes as well;

2)  the ability of your supporters to take a tax deduction for donations made to your organization.

Additional benefits are that the 501c3 organization may be eligible for private and government grants; the mission of the organization becomes protected from the personal interests of individuals; liability pertains to the nonprofit, not its individual officers or staff (with the exception of the fiduciary responsibility of its directors).

Along with the benefits of tax-exempt status, however, come responsibilities which some might view as disadvantages. There is paperwork, from the original application process through annual filings and mandated record retention. There is an initial filing fee, which can range from $200 to $850 or more. Furthermore, the 501c3 organization may require the services of legal and financial professionals, adding to the cost. Because nonprofits that have been granted 501c3 status are considered by the IRS to serve the public interest, these organizations are required to make their records available to the public for review.

As you can see, the decision to apply to the Internal Revenue Service for tax-exempt status is one that requires careful thought and preparation. 501c3 organizations enjoy a number of benefits and must meet very specific obligations in return.

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