501(c)(3) Organizations, An Overview

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Overview of IRC 501(c(3) Non-Profit Corporations

Organizations recognized as exempt under section 501(c(3) of the Internal Revenue Code are generally not required to pay income tax, which of course, is a beautiful thing if you run a business. This exemption from tax includes all sorts of things, from charitable contribution income to interest and dividends from investments. But, while the 501(c)(3) model is naturally very attractive, there are some very specific purposes for which one must exist, and even if a corporation initially qualifies, there are still very specific ways it must act in order to preserve its exemption as the business continues to operate. So, before thinking about forming a 501(c)(3) non-profit corporation, it’s important to consider what your rights and obligations are going to be going forward.

Organization

In order to qualify under IRC 501(c)(3), the organizational documents must be carefully drafted. Generally speaking, the organizational documents must follow the following guidelines:

a) Organizers must limit the organization’s purposes to one or more of the exempt purposes described in section 501(c)(3). This is the basic requirement of receiving tax exempt status. While for-profit corporations may engage in a wide range of activities, non-profit corporations must specifically limit those activities in which they actively engage.

b) The organizers should not empower the organization to engage, other than as an insubstantial part of its activities, in activities that are not in furtherance of one or more of those specific purposes permitted by IRC section 501(c)(3). This requirement may be met if the purposes stated in the articles of incorporation are limited in some way by reference to section 501(c)(3). In fact, specifically setting forth the purposes of the corporation in the articles of incorporation may help streamline the application process to a certain extent as well.

c) The organizers should permanently dedicate assets to exempt purposes. To satisfy this requirement, include a provision stating that upon dissolution, any assets remaining in the organization be distributed to an organization that is likewise tax-exempt under section 501(c)(3), or to the federal, state or local government for a public purpose. Although it is permissible to rely on state law to establish permanent dedication of assets for exempt purposes, the IRSD will process an organization’s application for recognition of exemption sooner if its articles or organization include a provision ensuring permanent dedication of assets for exempt purposes....

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Published In: Nonprofits Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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