Is a 501(c)(4) Entity in Your Nonprofit’s Future?

Many 501(c)(3) organizations might consider adding a 501(c)(4) entity to their overall corporate structure. 501(c)(3) nonprofit organizations often aim to serve their communities through various advocacy efforts in addition to the direct services they provide. Some would like to engage in additional lobbying or political activities in order to promote their mission. Designated 501(c)(3) entities may engage in certain lobbying activities, provided that is not a substantial part of their activities. Many nonprofits have made the 501(h) election in order to fix the amount of lobbying they can conduct without threatening their tax exempt status. If your nonprofit is looking to make an impact beyond prescribed lobbying limits, a 501(c)(4) entity could be in your future.

501(c)(4) entities differentiate from 501(c)(3)s because they “operate exclusively for the promotion of social welfare.” Social welfare can encompass a variety of issues, including those affecting retirees (AARP), gun education and safety (NRA), the environment (Sierra Club), and pro-Israel policies with the Congress and the Executive Branch (AIPAC). Oftentimes, the “c3” and related “c4” entities will work together to make a difference in public education, research, grassroots organizing, lobbying, and electoral work. However, unlike 501(c)(3)s, 501(c)(4) entities can be involved in both limited election influencing and lobbying activities. In exchange for greater freedom and less constrictions, 501(c)(4) organizations may not receive tax deductible contributions from individuals and corporations, which could make it more difficult to finance them. Nevertheless, these groups can engage in unlimited lobbying provided they are still primarily promoting social welfare. Additionally, they can engage in expenditures for political activity as long as it is less than 50 % of their total budget. “Political activities” eligible for 501(c)(4)s typically do not include making direct campaign contributions to federal candidates. However, the organizations could potentially contribute to state candidates, depending on state law.

The most common types of political activities 501(c)(4) organizations engage in include distributing voter guides comparing two candidate’s positions on their issue, conducting voter registration activities, publicizing their endorsement of a candidate, criticizing the opposing candidate, and funding independent expenditures in support of or in opposition to a candidate through media ads or social media. An organization could also decide to form a Political Action Committee (PAC) as a separate segregated fund. 501(c)(4)s should keep in mind that certain independent expenditures must be reported to the Federal Election Commission (FEC). For a long period of time, it has been debated whether the organizations should be required to disclose their donors. Generally, 501(c)(4)s do not disclose their donors to the FEC, but this could change. Organizations should consult with their appointed counsel to ensure they are complying with relevant election laws and disclosure requirements.

As always, there are costs and burdens associated with forming a related organization, including the additional funding and donors needed to add a new entity without any tax benefits. Furthermore, extra administrative professionals may be needed to handle the two organizations since additional financial and tax reporting is required. For more information on 501(c)(4)s and to determine if this is the right step for your organization, please consult the Alliance for Justice. Special thanks to Bill Farah of Berke/ Farah LLP, an expert in election law, for providing his insights on 501(c)(4)s for this blog.

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