What changes when you compare a 501(c)(3) and a 501(c)(4)?
Three things change. Donors get a deduction with a 501(c)(3) and not with a 501(c)(4), which matters if you fundraise from individuals. Political work has different rules, and a 501(c)(4) can engage in some campaign spending that a charitable organization cannot. And the filing burden is heavier for a 501(c)(3), because it files the full Form 990 series with the public charity schedule and must keep the underlying records open for inspection.
For a community group that wants to run voter registration drives, a 501(c)(4) is often the simpler path. For a charity that wants to accept deductible gifts and apply for foundation grants, a 501(c)(3) is the standard route. Some organizations run both, with a 501(c)(3) for the charitable work and a separate 501(c)(4) for advocacy, which is a structure that requires careful bookkeeping between them.
What is the difference between a public charity and a private foundation?
Every 501(c)(3) falls into one of two buckets, and the test is public support. A public charity must receive a substantial part of its support from the general public. The National Center for Charitable Statistics explains that the usual benchmark is at least one third of donated revenue coming from a broad base of individual, company, and public charity donors. Schools, hospitals, churches, and publicly supported organizations usually qualify automatically.
A private foundation is usually funded by one person or family and is run by that funder. Private foundations face more restrictions. They have a higher excise tax, tighter limits on how they spend money and on paying staff, and more reporting. Most organizations that set out to be charitable end up wanting public charity status, and the practical route is to build a broad donor base from day one rather than to switch later.
What does a nonprofit have to file each year?
Most file Form 990, and the filings are public, which is the part that surprises new organizations. The IRS requires a Form 990 from organizations with $25,000 or more in gross revenue. Smaller groups file the postcard form, and those under $10,000 in income generally do not have to file at all. A 501(c)(4) also files Form 990 but does not include the schedule that public charities use.
Keep the books in a way that a stranger could follow, because that is what an examination means. Separate the restricted gifts from the operating money, keep the receipts, and file on time. Filing late for several years is one of the most common reasons an organization loses its exemption, and it is much harder to fix than it is to prevent.
Can a nonprofit pay its staff and founders?
Yes, and every real nonprofit does. There is no rule against paying salaries, including a full time executive director. The rules are that the pay must be reasonable for the work and that profits cannot be distributed to owners or shareholders. A private foundation faces extra limits on compensation and on paying family members, which is one more reason to aim for public charity status.
If you are comparing a nonprofit to a for-profit business structure, our guide to S corp versus LLC lays out how the two pay owners differently. A nonprofit has no owners, so that comparison comes down to mission, deduction, and liability rather than tax rate.
What should you do before you file the paperwork?
Get the determination letter before you promise donors a deduction, because you cannot retroactively claim that donors could deduct gifts made before the exemption was granted. Then check your state, since state charitable solicitation registration is separate from federal exemption and many states require it before you fundraise in the state. Finally, write your mission statement and bylaws in plain language, because every filing and every grant reviewer will read them.
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Fazlur Rahman
