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What is a 501(c)3?

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Not all corporations are created to make profit. There are some enterprises where the main goal is to provide some type of service to the public. This type of organization will use a 501(c)3 to set themselves up as a charity.  Once an entity has this 501(c)3 it means that they are then exempt from most federal income taxes. In order to become eligible for such status the organization will have to meet certain criteria set down in law. Once this status has been granted it means that the organization is a legal entity responsible to the public.

How Does an Organization Achieve 501(c)3 Status

The way that a company will qualify for this status can vary across the United States; some states will have tougher criteria than others. There will be different factors which determine the costs of forming such a company and the size it must be. The rules can be quite complex and confusing and this is why it is always advised that anyone considering forming such an entity should seek proper legal advice. It is also important to keep in mind that the information needs to be appropriate to the state where you will be setting up this non-profit.

How Does a 501(c)3 Work in Practice

Once an organization has been recognized as a 501(c)3 it will not be able to change its status. In order words this entity cannot then decide that they wish to convert to a for-profit organization. They only way that this would be permissible would be if they completely dissolve the organization and started again from scratch. Another restriction associated with this type of entity is that it should not use its power to influence political elections. This means that they can’t be involved in promoting a candidate in elections or even show preference to a particular candidate.

The main benefit of having a company recognized as a 501(c)3 is that it means there is no need to pay income tax. Of course this allowance is only issued on the assumption that the organization is not making any profit. It is also required that those people who are in charge of running this entity do not receive any type of monetary reward. It is also not permissible that they should receive material rewards such as holidays paid for by the organization. Those charities that are found to be in breach of the conditions can find themselves in very hot water indeed.

The Importance of 501(c)3

The existence of 501(c)3 entities is very important for society. These organizations will work tirelessly in the community to provide useful services with no expectation of financial reward. There are many needy people around and it is hard to imagine how they could cope without this charitable organizations. Occasionally there will be a charity that is found to be not playing by the rules, but these are always the exception rather than the rule. The system is set up to ensure that fraudulent practices are rare.

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Meet the Author

Anthony Carter currently resides in Fife, Scotland with his wife Lisa, and their three wonderful children. As a senior editor for various publications, if he's not reading and writing, you would find him photographing and traveling to some of the most far-flung locations around the world.

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