Nonprofit 101: What’s the Difference Between 501c6 vs 501c3?
Confused about what these tax statuses mean? Read on to see these terms demystified.
You’re looking to apply for grants or in-kind donations and you stumble across these odd strings of numbers and letters, 501c6 and 501c3. What exactly do these mean for your organization’s eligibility, and what’s the difference between these very similar-looking codes? In this blog post, we’ll clarify how 501c6 and 501c3 differ, and what that means for your organization.
What do 501c6 and 501c3 have in common?
To better understand the differences between 501(c)(6) vs 501(c)(3), it’s important to first understand how they’re related.
Section 501(c)(3) and Section 501(c)(6) of the Internal Revenue Service (IRS) are used to categorize nonprofit organizations. Nonprofits that meet the requirements of these sections are considered tax-exempt.
Defining 501c6 vs 501c3
Now that we’ve established that Section 501(c)(6) and Section 501(c)(3) are closely related, we can focus on their exact definitions.
According to the IRS, Section 501(c)(3) organizations are charitable organizations. These are nonprofit organizations whose operations do not profit any private company or individual. Organizations that are classified as tax-exempt under Section 501(c)(3) are also not “action organizations,” or those that participate in lobbying activities. In general, organizations that may apply for exemption under Section 501(c)(3) include nonprofits, private foundations, and religious organizations or places of worship.
By contrast, the IRS states that organizations under Section 501(c)(6) include “business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues.” Similar to organizations under Section 501(c)(3), these organizations must be nonprofit organizations to qualify for this tax exemption. Unlike those under Section 501(c)(3), organizations under 501(c)(6) may participate in some lobbying or political activities, as long as these activities are relevant to their organizational purpose. While organizations under Section 501(c)(3) have a charitable purpose, business leagues under Section 501(c)(6) operate to further a business interest.
Though most nonprofits fall under Section 501(c)(3), Section 501(c)(6) and other sections exist to define the tax-exempt status of other nonprofit organizations. These other nonprofits include social clubs, veterans’ organizations, and fraternal societies.
In summary, the main difference between 501c6 vs 501c3 are the types of organizations that belong to each category; 501(c)(6) includes mostly business organizations, while 501(c)(3) includes charitable organizations. Relatedly, there are differences regarding how much lobbying a 501c6 vs 501c3 organization can participate in. However, all organizations under Section 501(c)(6) and Section 501(c)(3) are nonprofits.
501c6 vs 501c3: Why are these important?
If you’re looking to qualify for tax-exemption, formal recognition from the IRS as an organization under either Section 501(c)(6) or Section 501(c)(3) is necessary. Qualifying organizations must apply through the IRS to obtain tax-exempt status and fulfill annual filing requirements. If you’re applying for tax-exemption, it’s essential to understand whether you fall under 501(c)(6), 501(c)(3), or another nonprofit section altogether. Learn more about how to apply for exemption under Section 501(c)(3) here.
In the world of nonprofit fundraising, many companies who donate in-kind items require that applicants have a 501(c)(3) status. Foundations that offer grants may also specify a preference for nonprofit applicants, which may include 501(c)(6) or 501(c)(3) organizations. Being familiar with which section your organization falls under will help you to determine what donations and grants your organization is eligible for.
Final Thoughts
Although Section 501(c)(6) and Section 501(c)(3) both refer to tax-exempt nonprofit organizations recognized by the IRS, there are key differences regarding what types of organizations belong to each category and the degree of political involvement they can have. Knowing the difference between 501c6 vs 501c3 is important for understanding the purpose of your nonprofit and navigating available fundraising opportunities. With this knowledge, it’s easier to seek out grant and donation programs that are a great fit for your organization!
Looking to kickstart your fundraising today? Check out TheShareWay, a free online directory of thousands of grant opportunities and companies that donate in-kind items for nonprofits.