Here are five of the most frequently asked questions on cause marketing compliance that we are asked.  

1. When and where must a company be registered to conduct a charitable sales promotion (also known as a CCV)? What about the nonprofit beneficiary? 
2. Does a company need to register as a commercial co-venturer in every state that has a CCV registration requirement if it’s only conducting a charitable sales promotion on its website? 
3. What advertising disclosures must be included in a charitable sales promotion, and how can companies run into issues with their disclosures? 
4. What key strategies can nonprofits use to navigate unrelated business income tax (“UBIT”) issues during their cause marketing campaigns and corporate partnerships? 
5. What options are available for companies to engage with nonprofits that offer public visibility but are not subject to state CCV registration and reporting requirements? 

Navigating the compliance landscape of cause marketing can be complex. Still, the core goal remains the same: to ensure transparency, protect consumers, and make sure companies fulfill their commitments to nonprofit partners.

Cause marketing is powerful because it allows consumers to make a positive impact through their purchasing decisions. By proactively addressing registration requirements, providing clear disclosures, and strategizing with your nonprofit partner on the optimal campaign structure, companies can ensure that their campaigns are both effective and compliant with legal requirements. For more detailed answers to these questions and additional resources about cause marketing, visit the website of our long-term partner, Engage for Good — the leading community where cause meets commerce.

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Strategic Adaptations for 2026 and Beyond

To meet this evolving challenge, both sectors must adapt their partnership strategies.

For Businesses and Nonprofits

Implement “Bunching” Strategies

• Focus on negotiating larger, multi-year partnership commitments. This allows the company to concentrate contributions into specific tax years, ensuring the total donation clears the 1% threshold and maximizes the tax benefit.
• Explore Alternative Structuring of Cause Marketing Programs: Companies engaging in cause marketing can explore structuring of its cause marketing partnerships to generate royalty payments (in exchange for the use of the nonprofit’s name or logo) rather than traditional charitable donations, which may offer a different path for deductibility.

For Nonprofits

Deepen CSR Alignment

• Shift the focus from short-term campaigns to long-term partnerships that are inextricably linked to the corporate partner’s core values and robust CSR goals. Partnerships that demonstrate strong, long-term social impact will prove more sustainable than those driven purely by annual tax incentives.

By proactively adjusting their financial and engagement strategies now, both businesses and nonprofits can ensure their collaborations continue to thrive and generate meaningful impact despite the evolving tax rules.

This update was originally published in the December 2025 email newsletter of the firm’s long-term partner, Engage for Good— the leading community where cause meets commerce.

The post Preparing for the 2026 Tax Shift: Strategic Considerations for Corporate Partnerships appeared first on Perlman & Perlman.

This article highlights the key characteristics of different M&A transaction options, outlines strategic questions to ask to help identify the best transactional structure for your nonprofit, and reviews essential due diligence steps to follow. 

Structural Options
Mergers and acquisitions often appear similar because both are frequently announced as the combination of two organizations. However, the differences in these transaction structures carry significant legal implications, so understanding those distinctions is essential for deciding which is best for your nonprofit. A subsidiary restructuring is another frequently used option.

Merger
A merger is a legal combination of two or more entities into one. In a merger, the surviving corporation assumes all the non-surviving entity’s rights, assets, and liabilities. A nonprofit merger offers the advantage that any bequests or future gifts will go to the surviving organization. While this could be a significant benefit for organizations with a history of regularly receiving such planned gifts, many nonprofits do not have a history of receiving such gifts. Additionally, mergers come with the notable downside that all potential future claims and liabilities will persist within the merged entity. 

Acquisition (or Asset Transfer)
Unlike a merger, in an asset transfer acquisition, there is no automatic legal succession to all rights and obligations. Instead, only the transferor’s specifically identified assets and liabilities are transferred. The actual legal nature of the transaction is often a dissolution under applicable state law, where the asset transfer occurs as part of a dissolution proceeding. Acquisitions or asset transfer transactions are popular choices for organizations looking to expand their programs and assets but want to avoid the risk of taking on another organization’s liabilities. However, a nonprofit must take reasonable steps to address known and unknown liabilities before dissolving. 

Subsidiary Restructuring
Some organizations opt to bring another organization under its control through a subsidiary restructuring while continuing to operate as separate tax-exempt nonprofits. This structure might be chosen to keep the liabilities of different programs separate or to maintain distinct brand identities, while also benefiting from the cost efficiencies of a combined legal structure that often includes a cost-sharing or shared services arrangement. A subsidiary restructuring can be achieved by making one entity the sole member of the other. The “parent” nonprofit, as the sole member of the subsidiary, would have specific statutory rights regarding the “subsidiary” nonprofit, such as the right to elect the subsidiary’s directors and approve certain key corporate actions or transactions (e.g., mergers, asset transfers, dissolutions, and amendments to the certificate of incorporation). Additional rights may be granted to the member through the subsidiary’s certificate of incorporation or bylaws. However, the subsidiary’s board of directors is the legal fiduciary body responsible for overseeing the activities of the subsidiary, and appropriate corporate formalities must be maintained to ensure separation of liability between the parent and subsidiary. 

Strategic Questions
Deciding if a merger or acquisition is the right next step for your organization involves asking specific key questions.

• Will the transaction allow us to accomplish our mission better?
  Consider whether the transaction will help the organization enhance its services and program offerings or expand the reach of its programs.
• Will the transaction improve our operational and financial efficiency?
  Combining two smaller organizations or bringing a smaller organization’s programs into the operational framework of a larger organization can reduce the administrative costs necessary to support the combined programs.
• Do the organizations have sufficiently compatible organizational cultures and values?
  This question is particularly relevant if certain staff members or board members will move from one organization to the other as part of the transaction, which is often — though not always — the case.
• How much would the transaction cost in legal and other fees?
  For smaller organizations, complex transactions may not be practical or cost-effective. In addition to internal approvals, which may include approval by the board of directors and any voting members, some states also require Attorney General or court approval. Additional regulatory approvals may also be needed, depending on the organizations involved (e.g., state and federal education agencies for schools). That said, combining two organizations’ programs under one legal entity (or other unified structure) could be a worthwhile upfront investment for long-term savings and mission optimization.

Key Due Diligence Considerations
Nonprofits considering a merger or acquisition should thoroughly review key risk areas before moving forward. Although the due diligence process will differ based on the nature of the transaction and your nonprofit’s role in it, the following are important issues a nonprofit should examine regarding its counterparty. 

Financial Health
Look for fiscal stability, donor concentration risks, and hidden liabilities.

Tax and Regulatory Compliance
Make sure the other organization has historically fulfilled its tax and compliance obligations. 

Governance and Operational Health
Confirm whether the other organization followed good governance (e.g., annual conflict of interest disclosures, maintaining minutes of Board meetings) and operational practices (e.g., proper management of HR matters, internal financial controls, and data security).

Contracts
Determine which agreements require affirmative consent to be transferred and which should and can be terminated, versus those that would be critical or beneficial to continue. 

Legal Proceedings
Review for any active or potential lawsuits or legal proceedings and evaluate their possible impact after the transaction.

Staffing/HR Considerations
Assess potential retention risks, including any necessary adjustments to ensure equal treatment among similarly situated staff members after the transaction.

Assets & Liabilities
Make sure you understand the assets and liabilities of the other party, including whether it holds clear title to its key assets (such as real property and intellectual property).  

Reputation
Verify that the other organization has a trustworthy reputation among its stakeholders and the public. 

Whether your organization aims to enter a strategic growth phase or establish a home for your key programs before winding down, nonprofit mergers and acquisitions can be an effective tool to help you reach your goals. By understanding how different M&A options impact your ability to achieve your objectives, your nonprofit can confidently step into the next phase.

The post The Next Phase – Nonprofit Mergers & Acquisitions appeared first on Perlman & Perlman.

Hawaii’s new law follows California’s 2023 enactment of a similar law regulating charitable fundraising platforms. Hawaii’s decision to enact similar legislation was motivated by concerns about the legitimacy of some online fundraising campaigns to support Maui wildfire relief efforts.  As of now, California and Hawaii are the only states that have enacted legislation specifically aimed at regulating the activities of online platforms that facilitate charitable fundraising.  

The new law defines a “charitable fundraising platform” as “any person that uses the Internet to provide an internet website, service, or other platform to persons in the State, and performs, permits, or otherwise enables acts of solicitation to occur.” This broad definition closely mirrors the one used in California’s law and applies to most websites that facilitate the receipt of online donations, with few exceptions.

It also applies to websites that run multiple promotions, advertising that a portion of the purchase price from the sale of goods or services will be donated to specified charities. It also applies to websites or platforms that voluntarily invite customers to add a donation during the checkout process, or that encourage individuals to take specific actions to trigger donations. 

The bill also regulates platform charities, which are charitable organizations that facilitate acts of solicitation on a charitable fundraising platform.

Key Components of the New Law
As amended, Hawaii’s new law includes the following key components. 

1. Registration & Reporting
Charitable fundraising platforms and platform charities must annually register and submit information to the Attorney General’s office to enable them to ascertain whether charitable funds have been properly solicited, received, held, controlled, or distributed. This includes information on the number of donations made, the amount raised, the length of time for distributing donations or grants of recommended donations, fees charged by or through a charitable fundraising platform or platform charity, and names of recipient charities that were sent or have not yet been sent donations or grants of recommended donations.

2. Required Disclosures
The new law will require charitable fundraising platforms to clearly disclose certain information, including: (1) a statement about who will receive the donations; (2) if applicable, a statement that a recipient charity may not receive donations or grants of recommended donations, with an explanation identifying the most pertinent reasons that a recipient charity may not receive the funds; (3) the maximum length of time it takes to send the donation or a grant of the recommended donation to a recipient charity, with an explanation of the time needed (unless the donation is sent contemporaneously to the recipient charity); (4) the fees or other amount, if any, deducted from or added to the donation or a grant of the recommended donation; and (5) a statement as to the tax deductibility of the donation. The new law permits some, but not all, of these disclosures to be provided through a conspicuous hyperlink, so long as the disclosure is conspicuous when the hyperlink is selected.

3. Written Consent of Charity Beneficiaries 
Charitable fundraising platforms must obtain affirmative written consent from a recipient charity before using its name in a solicitation.

4. Soliciting or Receiving Funds Only for Charities in Good Standing 
A charitable fundraising platform or platform charity may only facilitate solicitations or receive donations for charitable organizations in good standing.  “Good standing” means the platform charity or other recipient charity is not prohibited from soliciting or operating in the state.  

5. Segregation of Funds
Charitable fundraising platforms and platform charities must hold charitable funds raised in a separate account or accounts from other funds belonging to the platform or platform charity.

6. Prompt Distribution of Donations/Grants and Donation Tax Receipts 
Fundraising platforms and platform charities must promptly send donations to recipient charitable organizations with an accounting of any fees assessed for processing the funds, subject to any additional regulations that may be established by the Hawaii Attorney General (which would presumably define what time frame constitutes “promptly”).   Fundraising platforms and platform charities must also promptly provide a donation tax receipt to the donor.

Avoiding Duplicative Registration and Compliance Obligations  
Recognizing that some charitable fundraising platforms could meet the definition of professional solicitor and commercial co-venturer, the law provides the following clarifications to avoid such overlap. 

1. Professional Solicitor
If an entity meets the definition of both a professional solicitor and a charitable fundraising platform, it will only be a professional solicitor when the entity, for compensation, performs any of the following acts of solicitation. 

• Direct mail solicitation, excluding electronic mail or messages
• Estate gift or estate planning solicitation
• In-person solicitation through a fundraising event, door-to-door or other public spaces, or a vending machine or similar equipment that does not use a person to perform the solicitation
• Noncash solicitation
• Nonincidental acts of solicitation that are not internet-based, including solicitation through print, radio, or television
• Solicitation involving receiving something of value, or a chance to win something of value, in connection with a donation
• Telephone solicitation
  
  

2. Commercial Co-venturer
An entity that meets the definition of both a commercial co-venturer and a charitable fundraising platform will be only a commercial co-venturer when the acts of solicitation through an internet website, service, or other platform to persons in the state are for six (6) or fewer recipient charities per calendar year.   Entities that conduct online charitable sales promotions for seven (7) or more recipient charities per calendar year will be regulated as charitable fundraising platforms.

The Recent Amendments
The recent amendments made a few key changes, including (a) eliminating state or federal tax-exempt status from the definition of “good standing;” (b) eliminating the imposition of vicarious liability on a platform charity for any misuse of funds by its partnering charitable fundraising platform; (c) eliminating the extension of certain provisions applicable to professional fundraisers (e.g., filing of contracts with charitable organizations; deposit of funds into a charitable organization’s bank account within 5 days of receipt); and (d) clarifying which regulations an entity is subject to if it meets the definition of both a commercial co-venturer and charitable fundraising platform. 

Key Differences from California’s Fundraising Platform Law
While Hawaii’s charitable fundraising platform law is modeled after California’s law, it differs in a couple of notable ways that make it both less and more burdensome.

1. Definition of “Good Standing”
Whereas California defines “good standing” to mean the platform charity or other recipient charity’s tax-exempt status has not been revoked by the Internal Revenue Service or the California Franchise Tax Board, or is not prohibited from soliciting or operating in California by the Attorney General; Hawaii’s definition of “good standing” (as recently amended) only includes organizations that the Attorney General has not prohibited from soliciting or operating in the state.  

While it is still to be seen how broadly or narrowly Hawaii will implement its good standing definition (read about the harsh consequences of California’s regulatory approach), Hawaii’s simpler definition should minimize the number of organizations that fundraising platforms must block from receiving donations. 

2. Written Consent
Unlike California’s law, which provides a limited exception when written consent is not required from a recipient charity if specific procedures are followed, Hawaii mandates charitable fundraising platforms to obtain affirmative written consent from any recipient charitable organization before including it on their platform. This difference in the approach to written consent will particularly impact fundraising platforms that facilitate donations to an extensive list of organizations where the benefiting organization is chosen by the donor/purchaser/user/peer-to-peer fundraiser (e.g., “choose from any of 1+ million charitable organizations to support”). In these platform structures, donations are typically first received by a platform charity, which then makes a grant to the selected recipient charity.  

To better understand how Hawaii’s charitable fundraising platform law compares to California’s, please read California Enacts New Law to Regulate Charitable Fundraising Platforms, which summarizes the key components of California’s law.

The Hawaii Attorney General has yet to publish registration and reporting forms for charitable fundraising platforms and platform charities, or rules implementing the new law. Stay tuned for further updates.

The post Hawaii Amends New Law Governing Charitable Fundraising Platforms appeared first on Perlman & Perlman.

Note 
This blog post has been updated from its original publication due to a bill (HB 177) enacted on May 27, 2025, which extends the effective date of Delaware’s new DBA registration system.

Delaware recently enacted legislation revising the process for registering trade names within the state. Beginning February 2, 2026, registration of trade names (i.e., DBAs or “doing business as” names) must be registered statewide with the Division of Revenue. This new process replaces the current framework in which registration and payment of fees are required on a per-county basis.

Any organizations or businesses that have previously filed DBAs in Delaware must re-register their trade names through Delaware’s new online-only registration system. We anticipate that Delaware will announce a re-registration period before the new registration process goes into effect.

DBAs are names that a business or organization uses to identify itself. Note that a trade name or DBA is different from a trademark, which is used to identify a good or service the organization offers. However, a name used as a DBA could also function as the organization’s trademark.

Key Updates

• DBA filings in Delaware will now be handled by the Division of Revenue at the state level.
• Delaware will begin administering its new statewide DBA registry on February 2, 2026.
• Any corporation incorporated in Delaware that wants to register a Delaware DBA or has previously registered a DBA in Delaware but does not actually conduct business in Delaware must obtain a special Trade Name Only business license from the Division of Revenue.
  

  
  The Trade Name Only license fee is $25 and must be renewed annually by December 31 (or can be renewed for three years for 3x the license fee). Note that a certificate of good standing is also required to obtain the Trade Name Only license.

• Trade names in Delaware do not require renewal as long as they are utilized by a business or organization possessing an active business license or trade name only license. If the requisite license is not maintained for three or more years, the trade name will revert to the available pool, and the business or organization will be notified.
• For additional information, Delaware has published a Trade Names FAQ.
• Beginning on February 2, 2025, you can visit https://onestop.delaware.gov/ to re-register your DBAs.

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Charitable sales promotions (a/k/a “CCV promotions”) are a popular cause marketing strategy for engaging customers motivated to support a cause through their purchases. State charitable solicitation laws regulate CCV promotions by imposing specific registration, reporting, contract, and advertising disclosure requirements on businesses conducting these promotions. 

CCV Registration and Reporting  

Companies that conduct these promotions nationally must register as a “commercial co-venturer” in seven states.¹  The registration and reporting process comprises a few key components

• • Annual registration of the business. 
  • Filing of a surety bond.
  • Filing of the contract and/or solicitation notice
  • Filing of a campaign report.

See this chart of commercial co-venturer state registration and reporting requirements.  Note that the nonprofit beneficiary of these promotions must be registered to solicit in the states where the promotion is conducted, and also has certain reporting obligations regarding the promotion.  

Contract Provision Requirements

The agreement between the business and nonprofit must include several contract provisions, including sales and donation estimates and state-specific compliance language.

Advertising Disclosure Requirements

CCV advertisements must include specific information about how a customer’s purchase will benefit a nonprofit organization. These requirements are most clearly articulated in industry best practices such as the BBB Wise Give Alliance’s Standards for Charity Accountability.  Notably, advertisements must include the percentage or dollar amount of the purchase price that will be donated to the nonprofit. Vague language like “a portion of proceeds from the sale of each product will go to ABC Nonprofit” does not comply with the disclosure requirements.

There are compelling reasons CCV campaigns are a widely used marketing strategy. CCV promotions allow you to directly involve consumers in the charitable impact while buying products and services they are (typically) already planning to purchase.  A well-designed promotion can make a brand’s product stand out among competing products. According to Edelman’s 2023 Trust Barometer, 63% of people buy or advocate for brands based on beliefs and values.  Unlike some of the alternatives discussed below, CCV promotions are the only campaign structure in which the customer’s purchasing decision directly supports the nonprofit partner.  This may be why hundreds of businesses choose to engage in CCV promotions every year.  The compliance requirements are very manageable with a bit of guidance and support (including resources like this article and those available on the Engage for Good website). Moreover, several registration service providers offer CCV registration services so you can focus on making sure your promotion is a success.  

While there are compelling reasons to conduct CCV promotions, a few situations suggest that a CCV promotion may not always be the ideal structure. Consider the following scenarios: 

1. The total anticipated donation amount is relatively small and may not justify the compliance costs and burdens associated with the promotion structure. 
2. The promotion is national in scope, but your nonprofit partner does not typically fundraise nationally (and may not even be based in the U.S.) and may not be prepared to register to solicit nationally just to be the beneficiary of your promotion.²   

For these and other reasons, companies may want to explore alternatives to the CCV promotion structure.

CCV Promotion Alternatives

Below are a few of the most common CCV promotion alternatives that allow a business to still actively partner with a nonprofit in ways that engage its customers and the public and publicly communicate its support for an important cause that aligns with its brand values, but without being subject to CCV compliance requirements. 

“Proud Supporter” Corporate Donation 

The closest alternative structure to a CCV promotion is if a business commits a fixed donation amount to the nonprofit and is granted the right to include language on its product packaging or other point of sale marketing materials about its support of the organization. For example, “Our Company is proud to support ABC Nonprofit with a $50,000 donation to support the planting of 50,000 trees.”  

To avoid being subject to CCV regulation, the marketing language should not state or suggest that the customer’s purchase of the product will trigger a donation to the nonprofit. Nevertheless, the business can still publicly communicate its support for a cause important to the brand while financially supporting the organization and raising public awareness for the cause, which helps garner positive goodwill for the brand and publicly reflect its brand values and commitments.   

Point of Sale Customer Donation Campaign

With over $5 billion raised through customer donations at retail checkout counters, it’s no wonder point-of-sale fundraising campaigns are a popular and effective way for companies to raise funds for their favorite charitable causes. Some companies have even added incentives by offering coupons or discounts to customers who make donations at checkout.  

If this type of campaign is conducted in stores nationwide, the nonprofit must be registered to solicit contributions in all applicable states. In addition, companies conducting these campaigns online at checkout must register as a “charitable fundraising platform” in California (and starting in 2026, in Hawaii) if the campaign includes online customers in those states.   An agreement should be established with the nonprofit, granting the company permission to solicit contributions from the public on its behalf. The agreement should outline the agreed-upon terms and include the solicitation dates, the states where they will be conducted, and the timing for transferring the collected donations. 

Matching Gift Campaign

Matching gift campaigns are popular fundraising strategies used by nonprofits to incentivize public donations through contributions made by one or more “match donors.” In a traditional matching gift campaign, a match donor pledges to match public donations dollar for dollar, often up to a specified donation cap and/or for a set time period.   With this type of campaign, the amount of the pledge that the “match donor” must pay is contingent upon the total donations received from the public in response to the campaign.  Companies can be powerful multipliers of public support by partnering with nonprofits to match donations made by their supporters.  Companies can also match public donations raised through customer donation campaigns that the business conducts at checkout.

When conducting matching gift campaigns, ensure you accurately describe how the campaign works, including the campaign period, the match amount (e.g., dollar for dollar), the method of donating that will trigger the donation (e.g., “donations made at checkout at Company stores during Earth Month” or “donations made through a unique matching gift campaign URL, like Company.NonprofitWebsite.org”), and any donation cap (e.g., up to $50,000).  Read this article for additional legal considerations in matching gift campaigns. 

Free Action Campaign

Free action campaigns involve donating to a nonprofit, triggered by actions taken by customers or other members of the public.  A purchase or use of the company’s products or services is not required. Free action campaigns allow a company to creatively engage the public, including: (1) signing up for your newsletter; (2) watching a short video; (3) liking, commenting on, or sharing a social media post; or (4) taking a survey. These actions can help generate greater awareness of your company, the cause, or both.  

The structure of free action campaigns is similar to CCV promotions because donations are triggered by specific actions that must be tracked. As such, the structure of contracts and disclosures for free action campaigns is also comparable to CCVs in establishing transparency and accountability. Currently, companies engaging in these campaigns online must register as a “charitable fundraising platform” in California (and starting in 2026, in Hawaii) if the campaign includes online customers in those states. 

Find the Right Campaign Structure for Your Business

Companies have numerous creative options for partnering with nonprofits through financial support and public awareness, while also building consumer loyalty for their brand and directly incentivizing product sales in the case of CCVs. Don’t let concerns about CCV regulation prevent you from finding the right win-win partnership with a nonprofit partner. 

Determining whether a CCV campaign structure is the most effective option requires considering your business goals, parameters, and constraints, as well as a practical understanding of compliance requirements.  It may be more achievable than you think!  If you conclude that a CCV promotion is not the right fit, consider exploring another creative way to partner with a nonprofit that will engage your customers and the public, generating significant positive goodwill for your brand while supporting an important cause.

1 The seven states that require companies engaging in these promotions (the companies are defined as “commercial co-venturers”) are: Alabama, California, Hawaii, Illinois, Massachusetts, Mississippi, and South Carolina.  California’s CCV registration requirement is optional, in that companies can follow certain contract and accounting requirements in lieu of registering.  Moreover, California’s new law governing charitable fundraising platforms requires companies conducting online CCV promotions to register as a charitable fundraising platform instead.  Illinois’ charitable solicitation law does not define the term “commercial co-venture,” but the state has taken the position that companies engaging in charitable sales promotions must register as “charitable trusts” if they generate more than $4,000 donations in a 12-month period.  Read this article to learn how to evaluate what state laws apply to an online-only CCV promotion.

2 Nonprofits soliciting charitable contributions nationally must register in about 38 states.

The post Should My Company Engage in a Commercial Co-Venture (CCV) Promotion?[br] <i>Strategic Considerations and Alternatives</i> appeared first on Perlman & Perlman.

Public Charity vs. Private Foundation

Every organization classified under section 501(c)(3) is categorized as either a private foundation or a public charity. The main distinction between the two lies in the level of public involvement in their activities.

Public charities typically receive a larger portion of their funding from the general public or government entities and engage more actively with the community. In contrast, a private foundation is usually overseen by family members or a small group of individuals, relying heavily on limited funding sources and investment income. Due to their lower level of public transparency, private foundations are subject to various operational restrictions and may incur excise taxes if they do not comply with these regulations.

Under tax law, an organization categorized under section 501(c)(3) is generally assumed to be a private foundation unless it formally requests and obtains a ruling to be recognized as a public charity. Organizations that qualify as public charities include schools, hospitals, churches, publicly supported organizations (which receive a specified portion of their total support from public sources), and certain supporting organizations. Churches, along with their integrated auxiliaries and conventions or associations, that fulfill the requirements of section 501(c)(3) of the Internal Revenue Code are automatically recognized as tax-exempt and do not need to apply for or obtain recognition of their exempt status from the IRS. 

Private foundations are categorized into two types: private non-operating foundations and private operating foundations, which are discussed and distinguished further below.

Public Charity

Public charities hold the most advantages among the three primary types of 501(c)(3) organizations. This is why many organizations aim to qualify as public charities to access the full benefits of this designation. These organizations typically engage in direct service or other tax-exempt activities but can also participate in grant-making initiatives. Their funding is obtained from diverse sources, including individual donations, government contributions, and private foundations.

An organization must meet one of three “public support” tests to obtain and maintain public charity status. The IRS considers an organization to have met the “public support” test if it satisfies either the (1) one-third (1/3) support test or the (2) ten percent (10%) facts and circumstances test.

One-Third Public Support Tests
To meet one of the two “one-third public support tests,” an organization must fulfill one of the following criteria: 

1. It must receive at least one-third of its support through contributions from other public charities, governmental agencies, and/or the general public. 
2. Alternatively, it can receive no more than one-third of its support from gross investment income while obtaining more than one-third of its support from contributions, membership fees, and gross receipts from tax-exempt activities.

It is important to note that any grant or contribution received from sources other than governmental entities or another public charity—provided that they meet the “one-third” test—counts as public support only up to a limit of 2% of the total support received over a five-year assessment period. 

For example, if an organization receives a total support of $100,000 over five years and obtains a grant of $40,000 from a private foundation, the entire $40,000 will count towards total support. However, only $2,000 (which is 2% of $100,000) of that grant will be counted as public support.

This limitation can create what is known as a “tipping” problem. A large contribution from a private foundation or an individual is capped at the 2% limit, which can increase the overall total support figure without a corresponding increase in the public support amount. As a result, this may lead the organization to fail the “one-third” test.

Ten-Percent Facts and Circumstances Test
If an organization cannot demonstrate that it is likely to meet the one-third support test, it can still qualify as a public charity by meeting the following criteria: (1) at least ten percent (10%) of its total support must come from a variety of public sources, (2) there must be widespread public interest in its programs, (3) it should have a continuous fundraising program aimed at reaching a diverse segment of the public, and (4) its board of directors must represent public interests effectively.

Advantages of Public Charity Status

Higher Tax-Deductibility Limits
One of the biggest advantages of being a public charity is that donors can deduct cash contributions in full up to 60% of their adjusted gross income.  This advantage means that individual donors have a greater tax benefit from contributing to public charities than private foundations (as further explained below).

Easier to Receive Grants from Private Non-Operating Foundations
Due to specific tax regulations, private foundations typically prefer to grant funds to public charities instead of other private foundations. As a result, if your organization is set up as a public charity, it is likely to receive more grants from private foundations compared to being structured as a private foundation.

Not Subject to Stricter Regulations Applicable to Private Foundations
Public charities have several advantages over private foundations, primarily because they are exempt from many of the stringent requirements that private foundations face. For example, public charities are not required to spend a specific minimum amount of their funds each year, known as “qualifying distributions,” which is mandatory for private foundations. However, in practice, most public charities tend to spend more than the minimum required to support their charitable activities. Public charities are not subject to the strict self-dealing rules that apply to private foundations; they do not have to pay a tax on their net investment income.

Ability to Engage in Limited Lobbying Activities
Public charities may also engage in a certain limited number of lobbying activities, as compared to private foundations and private operating foundations, which are completely prohibited from engaging in any lobbying activities.² 

Disadvantages of Public Charity Status

There are technically no disadvantages to public charity status, except for the requirement that the organization meet the IRS’s public support test. This means the organization needs to receive funding from a diverse range of sources. However, organizations that secure sufficient funding from limited sources—such as a small group of dedicated donors or an endowment—may not find it necessary or beneficial to focus on continuous fundraising efforts. Consequently, public charity status might not be the best tax-exempt option for organizations that prefer to avoid ongoing fundraising activities.

Private Non-Operating Foundation

When an organization does not qualify as a public charity, the IRS automatically classifies it as a private non-operating foundation. Private foundations are usually funded by a small group of individuals, such as family members, or a single primary source, like a corporation. Most private non-operating foundations focus primarily on grantmaking to fulfill their charitable objectives and typically do not run their own charitable programs. However, it is important to note that non-operating foundations are not prohibited from conducting direct charitable activities if they choose to do so.

Advantages of Private Non-Operating Foundation Status

No Requirement to Fundraise
Private foundations do not need to ensure that they receive their funding from broad “public support.” This alleviates the administrative burden of making sure donations are not primarily from a limited number of donors.

Disadvantages of Private Non-Operating Foundation Status

Tax-Deductibility
Donors face a significant disadvantage in terms of tax deductibility when compared to public charities. Cash donations made to private foundations are only tax-deductible up to 30% of a donor’s adjusted gross income. As a result, many large donors tend to prefer donating to public charities instead.

Qualifying Distributions
The IRS mandates that private foundations adhere to several additional requirements that do not apply to public charities. One specific requirement is that private foundations must make “qualifying distributions” to eligible public charities or other tax-exempt organizations. These distributions must be equal to 5% of the average fair market value of their assets from the previous year.

Grantmaking Oversight
Private foundations that make grants to other private foundations, foreign organizations, or any entities that are not 501(c)(3) public charities must ensure proper oversight of these grants. This can be achieved through one of two methods: 

1. “Equivalency Determination” The foundation determines that the grantee organization is equivalent to a U.S. public charity. 
2. “Expenditure Responsibility” The foundation implements measures to ensure that the grant funds are used for charitable purposes.

The rules surrounding expenditure responsibility require detailed accounting and documentation to confirm that grants given to private foundations and other organizations not classified as public charities are spent appropriately—specifically, for charitable purposes rather than for private benefit or political gain. Due to these additional oversight requirements, private foundations may be discouraged from making grants to organizations that are not public charities. As a result, they typically concentrate their grantmaking efforts on supporting public charities.

Tax on Net Investment Income
Private foundations face additional taxes that public charities do not, including a 1.39% excise tax on their net investment income.

Prohibition on Self-Dealing Transactions
Private foundations are generally prohibited from engaging in financial transactions with insiders associated with the foundation. These transactions are referred to as “self-dealing transactions.” The following activities are typically considered self-dealing between a private foundation and a disqualified person: 

1. Sale, exchange, or leasing of property.
2. Leasing agreements.
3. Lending money or extending credit.
4. Providing goods, services, or facilities.
5. Paying compensation or reimbursing expenses to a disqualified person.
6. Transferring foundation income or assets to, or for the benefit of, a disqualified person.
7. Certain agreements to make payments of money or property to government officials.

The prohibition on self-dealing means that members of the foundation’s board and other disqualified persons, including significant contributors, are not allowed to personally benefit from any transactions that the foundation conducts. In contrast, public charities can engage in these types of transactions as long as the board determines that the transactions are in the charity’s best interest. The ban on self-dealing is quite extensive; even payments made to a disqualified person for goods or services rendered at or below fair market value are prohibited. Therefore, avoiding financial transactions between disqualified persons and the foundation is crucial.

Tax on Excess Business Holdings
Private foundations are subject to a tax on their excess business holdings. This tax effectively prohibits a foundation and its disqualified persons from owning more than 20% of the voting stock of a business enterprise in total.

Tax on Jeopardizing Investments
Private foundations are also subject to a punitive tax on certain risky investments, known as “jeopardizing investments.” Jeopardizing investments are those that generally show a lack of reasonable business care and prudence in providing for the foundation’s long- and short-term financial needs to carry out its exempt function. No single factor determines whether an investment should be deemed a jeopardizing investment; rather, the determination must be made on an investment-by-investment basis, taking into account the foundation’s portfolio as a whole. The foundation managers may consider expected returns, risks of rising and falling prices, and the need for diversification within the portfolio.

Private Operating Foundation

A private operating foundation is a special type of private foundation. It is typically established if an organization cannot achieve public charity status but can satisfy certain other criteria.

The primary distinction between private operating foundations and private non-operating foundations lies in their activities. Private operating foundations actively conduct their own charitable programs, whereas non-operating foundations do not. Because of this essential difference, private operating foundations must adhere to regulations similar to those governing public charities, which tend to be more favorable than those that apply to non-operating foundations.

Advantages of Private Operating Foundation Status

Grants from Private Non-Operating Foundations Count Towards the Grantor’s Qualifying Distributions
Private operating foundations are eligible to receive “qualifying distributions” from other private foundations in the same way that public charities are eligible to receive them for the conduct of their own charitable programs. This benefit makes it more likely that a private foundation would grant to a private operating foundation than to a private non-operating foundation.

Higher Tax-Deductibility than Contributions to Non-Operating Foundations
Private operating foundations are subject to the more generous donation deductibility limits applicable to public charities (whereas donations to non-operating foundations have lower deductibility limits). Because wealthier donors are sensitive to the deductibility cap, the more generous tax-deductibility limits available to private operating foundations is typically the primary motivation for founder-philanthropists to seek private operating foundation status over non-operating foundation status.

Cash contributions made to operating foundations are deductible for taxpayers up to 60% of their adjusted gross income (AGI), similar to the deduction limit for public charities. In contrast, for non-operating foundations, the limit is 30%. 

Donations of long-term capital gain property—such as artwork or real estate—are also deductible when given to operating foundations, with a limit of 30% of the taxpayer’s AGI, akin to donations made to public charities. However, this deduction is limited to 20% of the donor’s AGI for non-operating foundations. 

Additionally, the deduction for long-term capital gain property donated to an operating foundation is generally based on the property’s fair market value on the date of the contribution. Conversely, for non-operating foundations, the deduction for long-term capital gain property (excluding qualified appreciated stock) is limited to the donor’s tax basis in the property.

Disadvantages of Private Operating Foundation Status

Compliance with Strict Financial Tests
A private operating foundation must allocate most of its resources—either its earnings or assets—toward actively pursuing its tax-exempt activities. Specifically, it must spend at least 85 percent of its adjusted net income or its minimum investment return (whichever is less) directly on these exempt activities. This requirement is known as the income test. 

In addition to passing the income test, the foundation must also meet one of the following tests: (1) the assets test, (2) the endowment test, or (3) the support test. Together, these tests constitute the qualifying distribution requirement for private operating foundations. 

Private operating foundations must demonstrate compliance with these tests every year by providing information in the annual Form 990-PF filed with the IRS.

Restrictions applicable to non-operating foundations
Private operating foundations are also subject to taxes on self-dealing, excess business holdings, jeopardizing investments, and net investment income.

Conclusion

Choosing the right 501(c)(3) classification—whether as a public charity, a private non-operating foundation, or a private operating foundation—depends largely on the specific goals of the organization and its planned sources of funding. While it is relatively easy to switch from a public charity to a private non-operating foundation, it is a much more complex process to seek reclassification from a private foundation to a public charity. Therefore, it is crucial to understand the differences between these classifications in order to select the most suitable one for your goals from the start.

1   A 501(c)(3) refers to the federal tax code section granting tax-exempt status to certain organizations.

2  A narrow exception to the lobbying prohibition exists in connection with lobbying in “self-defense” on legislation that would affect the existence, powers, duties, or tax-exempt status of a private foundation or its ability to receive deductible contributions.

The post Comparison of 501(c)(3) Tax-Exempt Classifications [br] <i>Public Charity, Private Non-Operating Foundation, and Private Operating Foundation</i> appeared first on Perlman & Perlman.

This article provides an overview of the process that charitable nonprofit corporations incorporated in New York must follow to legally dissolve.

Most charitable nonprofits in New York must petition the Attorney General’s office or the court for approval before dissolving, following one of two procedures.

Voluntary Dissolution with No Assets

This simplified dissolution procedure is used for charitable corporations that have no assets or liabilities at the time of dissolution. It requires filing a petition for approval of a certificate of dissolution with the Attorney General’s office.  Under the New York Not-for-Profit Corporation Law (“N-PCL”), a dissolving corporation can use a simplified dissolution procedure if it has no more than $25,000 in a reserve fund to cover the costs of winding up its affairs (such as legal and accounting fees) and has liabilities that do not exceed $10,000. As a matter of practice, our firm generally waits until the corporation has no remaining assets or liabilities before filing a petition with the Attorney General’s office to approve a certificate of dissolution.  

For additional information, see the Attorney General’s published guidance on this “no asset” dissolution process.  

Voluntary Dissolution with Assets 

An “asset dissolution” occurs when a corporation has remaining assets to distribute before it officially dissolves. This process involves two petitions. First, the Attorney General must approve a petition for approval of a plan for dissolution and distribution of assets—referred to as the “Plan of Dissolution.” Second, once the approved Plan of Dissolution has been fully executed, a petition for approval of a certificate of dissolution must be submitted.

For additional information, see the Attorney General’s published guidance on this “asset dissolution” process.  

If you are unsure which procedures apply to your organization, consider consulting legal counsel to determine the appropriate process.

The Dissolution Process

    1. The Board of Directors must adopt a Plan of Dissolution.

The Board may adopt the plan at a board meeting or through unanimous written consent in lieu of a board  meeting. 

    2. The Plan of Dissolution must be approved by the voting members, if any.

To approve the dissolution of the corporation, at least two-thirds of the members must vote in favor during a membership meeting where a quorum is present. If the corporation’s governing documents allow it, member approval can also be obtained through unanimous written consent. If the corporation does not have “members” as defined under the N-PCL, then this step is skipped. 

    3. Obtain governmental entity approval to dissolve, if required.  

If government agency approval was required for the establishment of the corporation, the corporation must secure written approval for its dissolution from the same governmental entity. 

    4. Prepare a certificate of dissolution.  

The New York Department of State provides a template certificate of dissolution. 

    5. Ensure that all registration and reporting requirements are up to date.  

The corporation must be in compliance with the registration and reporting requirements outlined in section 8-1.4 of the Estates, Powers and Trusts Law (EPTL) and/or Article 7-A of the Executive Law before the Attorney General can approve the certificate of dissolution. If the organization has not complied, has been exempt from filing annual financial reports, or is not subject to the registration and reporting requirements, certain registration and financial reports will be necessary prior to dissolution.

    6. File Petition(s) with the Attorney General.  

As noted earlier, a simplified dissolution process for corporations without assets requires only one petition. By contrast, if an organization has assets, it must file two petitions with the Attorney General. Once approved, the Attorney General will issue an Order approving the Plan of Dissolution for the first step of an asset dissolution and/or return an endorsed copy of the Certificate of Dissolution indicating the Attorney General’s approval. 

Additionally, the corporation has the option to file a petition in court (specifically, in the State Supreme Court of the appropriate county) on notice to the Attorney General. However, this court process may take longer due to the involvement of two regulatory bodies.

    7. Obtain consent to the dissolution from the New York State Department of Taxation and Finance. 

This tax consent is obtained by submitting Form CT-247. Based on our experience, it typically takes at least 4 to 6 weeks to receive the consent, and it can sometimes take longer. This step can be completed concurrently with the submission of the petition or petitions to the Attorney General, as the consent is not required until the Certificate of Dissolution has been approved and is ready to be filed.

    8. File the approved Certificate of Dissolution with the New York Department of State.  

The Certificate of Dissolution must be filed along with any applicable governmental agency approvals and the tax consent.

    9. The Department of State will send the organization a filing receipt indicating that the certificate of  dissolution has been filed. 

  10. The corporation must send a copy of the filing receipt to the Attorney General’s office. 

Ensure that the corporation has complied with IRS requirements relating to the termination of an exempt organization.  

Additional Issues for the Dissolution Process

Final Grant Agreements

The final wind-down process may include the disbursement of final assets to one or more grantees.  This may require the drafting of grant agreements to ensure that the assets will be used for purposes aligned with the corporation’s purposes.

Tail Insurance 

The corporation may want to consider obtaining tail insurance to provide its directors and officers with additional protection for an appropriate period (perhaps 1-3 years) following the dissolution.  Consult with your insurance broker for options and pricing.

Timing 

While there is no official time period published on how long the Attorney General review process takes, in our experience, the time required for petitions to be initially reviewed can range from several weeks to several months.  Because an asset dissolution requires Attorney General approval of two petitions, asset dissolutions will take substantially longer to complete than the no-asset simplified dissolution process.  With respect to any submission, the Attorney General often requires additional information, documentation, and edits to the petition, which can further lengthen the time required for approval of the dissolution.

Special Procedures for Certain Organizations

Non-Charitable Corporations 

Generally, non-charitable corporations do not need court or Attorney General approval to dissolve, and the simplified dissolution procedure does not apply to them. However, trade associations that are dissolving must obtain approval from the Attorney General’s Antitrust Bureau. Additionally, if a non-charitable corporation holds assets for charitable purposes or has donor-restricted funds, it must follow the proper procedures for an asset dissolution.

Religious Corporations

Dissolution of religious corporations is governed exclusively by section 18 of the Religious Corporations Law. Court approval is necessary for the dissolution, but the Attorney General is not involved in the process. One of the notable requirements is publication of a notice in a local newspaper for four consecutive weeks regarding the planned filing of the court petition.

Grant-making Private Foundations 

According to an FAQ from the Attorney General’s office, private foundations that grant funds are allowed to spend down their assets by making charitable donations to other tax-exempt organizations as part of their normal operations. However, if a grant-making private foundation wishes to transfer its assets to another private foundation, it must obtain court approval. This can be done either through an asset dissolution process or by filing a petition under N-PCL sections 510 or 511.

Organizations with liabilities that exceed their assets

If a dissolving corporation has liabilities that exceed its assets and is able to negotiate the reduction or forgiveness of any debts with its creditors, it may opt for a simplified dissolution. In this case, the corporation should attach copies of any relevant agreements as exhibits to its petition. However, insolvent corporations must follow the procedures for judicial dissolution outlined in Article 11 of the N-PCL. In certain situations, filing for bankruptcy may be more suitable. It is advisable to consult with bankruptcy counsel to determine whether a bankruptcy filing is preferable and appropriate.

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When incorporating a new nonprofit, it’s important to consider some legal aspects. The first step is to choose the state where the nonprofit will be incorporated. It’s possible to incorporate a nonprofit in any state, regardless of where its activities will be carried out. Once the state of incorporation is chosen, the next step is to draft and file a certificate of incorporation to formally establish the organization. This article addresses the key issues to think about when incorporating a nonprofit.

Which state should we incorporate our nonprofit in?

When deciding where to incorporate, consider two main factors: (1) where the nonprofit will primarily operate and (2) the complexity or burden of complying with a state’s laws and regulations. Some nonprofits choose to incorporate in the state where they will primarily operate, while others choose a jurisdiction based on its flexibility in structuring internal governance.

Certain states, including New York, California, and Massachusetts, have corporate statutes that limit or dictate governance choices and require regulatory notification or approval for significant transactions, such as mergers, significant asset transfers, or dissolution. On the other hand, states like Delaware have fewer rules about how companies should be managed and approved by regulators. The Attorney General of Delaware doesn’t need to review or approve corporate transactions beforehand, and Delaware’s laws governing corporations are more flexible compared to laws in other states.

Before selecting a state for incorporation, it’s important for the organizers to work closely with a qualified attorney to understand the available options. State nonprofit corporation laws govern many aspects of the governance structure, including the minimum size of the governing board, membership rights and procedures, board election and removal procedures, and processes for managing conflicts of interest or conducting an annual audit. Some state laws may also require regulatory or court approval for major transactions. These requirements can significantly impact the time and money needed for compliance as the nonprofit grows and evolves.  

Are there additional requirements when incorporating in a state where we have no operations? 

If a nonprofit is incorporated in a state where it is not primarily operating (known as the state of legal domicile), it must fulfill additional compliance requirements that would not apply if it were incorporated in its state of legal domicile. However, many nonprofits find these extra requirements manageable and worthwhile because of the advantages of incorporating in a state with a more flexible regulatory approach.

1. The nonprofit must have a registered agent in the state where it is incorporated. The registered agent is responsible for receiving legal mail on behalf of the nonprofit, such as service of process. There are corporate filing services that offer registered agent services for a reasonable annual fee.

2. The nonprofit is often required to file an annual report in its state of incorporation. For example, a nonprofit incorporated in Delaware must submit a Delaware Annual Report by March 1st each year, along with a $25.00 filing fee.

3. The nonprofit must also qualify to “do business” in the state where it primarily operates. This involves making an initial filing with the state and then filing annual reports to maintain its status. 

Nonprofit organizations, regardless of where they are incorporated, must register annually with state charity regulatory offices in order to solicit charitable contributions or hold charitable assets in all applicable states, including their state of legal domicile. For example, a nonprofit incorporated in Delaware, located in New York, and soliciting funds in New York is not subject to most of the governance requirements of the New York Not-for-Profit Corporation Law. However, in addition to registering to do business in New York with the New York Department of State, the nonprofit must also register annually with the New York Attorney General’s Charities Bureau, which regulates charitable solicitation and assets within the state. It’s important to note that many states’ laws exempt hospitals, educational institutions, and religious organizations from the charitable registration requirement. The scope of the exemption, as well as the manner of obtaining it, varies from state to state. 

What provisions are required to be included in our certificate of incorporation? 
What provisions are optional?

The certificate of incorporation is a crucial document that establishes a nonprofit organization’s legal and operational framework. Some states refer to this document as the Articles of Incorporation. It outlines the nonprofit’s purpose(s) and provides basic information about its structure and governance. Careful attention to several key issues is required when drafting the certificate to ensure that the nonprofit is formed correctly, eligible for federal tax-exempt status when sought, and compliant with relevant state and federal laws. 

When creating a certificate of incorporation, the required provisions may vary depending on the state’s laws. However, the following are the standard state-required clauses:

1. The legal name of the organization
2. The name and address of the incorporator
3. The purpose or purposes for which the corporation is formed
4. Designation of the secretary of state as an agent of the corporation for receiving legal documents
5. If the corporation must have a registered agent, the name and address of the corporation’s registered agent in the state
6. Whether the corporation will have members or a statement noting that provisions relating to membership will be in the corporation’s bylaws.

Several states also require the names and addresses of the initial directors to be included in the certificate of incorporation. 

When a nonprofit wants to apply for 501(c)(3) tax-exempt status, there are specific requirements to consider. While a corporation can generally be established for any legal purpose, for 501(c)(3) status, a nonprofit corporation must be organized and operated exclusively for one or more of the purposes described in section 501(c)(3) of the Internal Revenue Code. Meeting the first part of this requirement – the “organizational test” – typically requires a nonprofit to include language in its certificate of incorporation that explicitly limits its corporate purposes. The IRS Form 1023 (the application for 501(c)(3) status) states: Your organizing document must restrict your purposes to those described in section 501(c)(3). These purposes include charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.

The instructions for Form 1023 state that it is generally enough to limit a nonprofit’s purposes by referring to section 501(c)(3) to meet the organizational test under section 501(c)(3). The IRS gives an example of an acceptable purpose clause as follows: The organization is exclusively organized for charitable, religious, educational, and scientific purposes under section 501(c)(3) of the Internal Revenue Code or corresponding sections of any future federal tax code.            

Alternatively, a nonprofit organization’s certificate of incorporation can fulfill the organizational test by specifying a particular charitable purpose. If this approach is chosen, nonprofits should be cautious in crafting a purpose description that does not overly restrict the organization’s ability to effectively pursue its broader charitable goals.

According to Form 1023 instructions, the nonprofit’s certificate of incorporation must ensure the permanent dedication of its assets to a section 501(c)(3) purpose. In the event of dissolution, a 501(c)(3) tax-exempt nonprofit must distribute its assets for an exempt purpose described in section 501(c)(3), or to the federal, state, or local government for a public purpose. In some states, nonprofits can rely on state law to establish the permanent dedication of assets for exempt purposes. 

Form 1023 instructions offer the following example of an acceptable dissolution clause: 

Upon the dissolution of this organization, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code or corresponding section of any future federal tax code or shall be distributed to the federal government, or a state or local government, for a public purpose.

Nonprofits may want to include a provision setting forth the statutory limitations or prohibitions applicable to 501(c)(3) nonprofits regarding lobbying and political campaign activities. 

How long does it take for the certificate of incorporation to be filed? 

States may take anywhere from a few days to a few weeks from the submission date to file the certificate of incorporation. The speed of incorporation is another factor that may influence the decision of where your nonprofit should incorporate. It is easier and faster to incorporate in some states than others. Many states offer expedited filing for an additional fee, including 24-hour, same-day, or even 2-hour expedited filing.

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501(c)(3) Charitable Organizations

Purposes
501(c)(3) organizations operate exclusively for charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.  For purposes of section 501(c)(3), the term charitable is used in its generally accepted legal sense and includes:

• Relief of the poor, the distressed, or the underprivileged
• Advancement of religion
• Advancement of education or science
• Erecting or maintaining public buildings, monuments, or works
• Lessening the burdens of government
• Lessening neighborhood tensions
• Eliminating prejudice and discrimination
• Defending human and civil rights secured by law
• Combating community deterioration and juvenile delinquency

Public Charity vs. Private Foundation
Every 501(c)(3) organization is classified as either a private foundation or a public charity. Private foundations and public charities are primarily distinguished by the level of public involvement in their activities. Public charities normally receive a significant portion of their financial support from the general public or governmental units and interact more with the public. 

A private foundation is typically funded by a single person, a family, or a company. Private foundations are subject to stricter operating restrictions because they are less open to public scrutiny than public charities. They are subject to certain excise taxes for failure to comply with those restrictions.  

Private foundations are further classified between private non-operating foundations and private operating foundations. The main difference is that private operating foundations actively “operate” or conduct their own charitable programs. Because of this major difference, private operating foundations are subject to the same regulations as public charities on a few key matters, which are generally more favorable than the rules applicable to non-operating foundations.

Lobbying
Lobbying is any attempt to influence legislation, including acts, bills, resolutions, or ballot initiatives by Congress, state legislatures, local councils, or similar governing bodies.

A public charity is not permitted to engage in substantial legislative activities. If lobbying activities are substantial, a 501(c)(3) organization may fail the operational test, risk losing its tax-exempt status, and, in certain cases, be liable for excise taxes.

Like public charities, private foundations will jeopardize their 501(c)(3) status if lobbying is a substantial part of their activities. However, private foundations are subject to a significant excise tax on their lobbying expenditures, such that the excise tax generally acts as a lobbying prohibition for private foundations.  A limited exception to this lobbying prohibition, known as the “self-defense” exception, applies if the communication addresses legislation that affects the foundation’s existence, powers and duties, tax-exempt status and/or deductibility of contributions.

Political Campaign Activities
All 501(c)(3) organizations are prohibited from directly or indirectly participating in or intervening in any political campaign on behalf of (or in opposition to) any candidate for elective public office.  Prohibited political campaign activities include any statements made by or on behalf of the organization in favor of or in opposition to any candidate for public office and contributions to political campaign funds.  Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of excise taxes on the organization.

Tax-Deductibility and other Characteristics 
Donations to 501(c)(3) organizations are tax-deductible, though the deductibility limits vary between public charities and private foundations (and generally are more generous for public charities). In addition, 501(c)(3) organizations are generally exempt from state income tax exemption and state sales tax exemption (although some states only grant sales tax exemption to a narrow subset of 501(c)(3) organizations).  501(c)(3) organizations are also generally eligible for the nonprofit mail rate, which provides a significant discount. 

Applying for Tax-Exempt Status
Organizations seeking 501(c)(3) tax-exempt status must file the Form 1023 or Form 1023-EZ.  Churches that meet the requirements of IRC Section 501(c)(3) are automatically considered tax-exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS, although many churches choose to apply for tax-exempt status to obtain the certainty of the IRS’s determination. A written IRS determination can also simplify applying for other benefits, like state tax exemptions.

501(c)(4) Social Welfare Organizations

Purposes
501(c)(4) organizations must be operated exclusively for the promotion of social welfare.  The tax regulations specify that an organization operates exclusively to promote social welfare if it is primarily engaged in promoting the common good and general welfare of the people of the community.

Lobbying
501(c)(4) organizations may engage in unlimited lobbying related to their exempt purposes without jeopardizing their tax-exempt status.  This ability to engage significantly in lobbying activities is a key reason many organizations choose the 501(c)(4) designation.

Political Campaign Activities
501(c)(4) organizations can engage in political campaign activities if not the organization’s primary activity. 

Tax-Deductibility and other Characteristics
Donations to a 501(c)(4) organization are not tax-deductible. In addition, the names and addresses of donors do not need to be disclosed to the IRS in its annual Form 990 filing.  By contrast, all 501(c)(3) organizations must disclose their donors to the IRS in their Form 990 filings, and information about private foundation donors is made publicly available by the IRS.  Some organizations may also choose to seek 501(c)(4) status (especially as an alternative to 501(c)(3) private foundation status) if their donors do not need the benefit of tax-deductibility of their donations, and they would benefit from the more flexible rules applicable to 501(c)(4) organizations.

Applying for Tax-Exempt Status  
Organizations seeking 501(c)(4) tax-exempt status must file the Form 8976 Notice of Intent to Operate Under Section 501(c)(4), generally within 60 days of its formation. In addition to submitting Form 8976, organizations operating as 501(c)(4) organizations may also choose to file Form 1024-A to request recognition of tax-exempt status. Submitting Form 1024-A does not relieve an organization of the requirement to submit Form 8976.

501(c)(6) Business Leagues

Purposes
501(c)(6) organizations include business leagues, chambers of commerce, real-estate boards, and boards of trade.  A business league, which is perhaps the most common type of 501(c)(6) organization, is an association of persons having a common business interest, the purpose of which is to promote such common business interest and not to engage in a regular business of a kind ordinarily carried on for profit. Business leagues include trade associations and professional associations. To be considered exempt, a business league’s activities must be devoted to improving the business conditions of one or more lines of business as distinguished from performing particular services for individuals. 

Lobbying
501(c)(6) organizations may conduct unlimited lobbying to further their exempt purposes without jeopardizing their tax-exempt status.  An organization that engages in these activities must give its members notice of amounts of membership dues allocable to nondeductible lobbying expenditures; failure to provide such notice may subject the organization to a proxy tax on the amount of the expenditures.

Political Campaign Activities
501(c)(6) organizations are permitted to engage in political campaign activities if they are not the organization’s primary activity.

Tax-Deductibility and other Characteristics
Donations to a 501(c)(6) organization are not tax-deductible. 

Applying for Tax–Exempt Status
Organizations seeking 501(c)(6) tax-exempt status must file the Form 1024 with the IRS. 

Keep in mind that organizations engaging in lobbying and political campaign activities may also be subject to federal, state, and, in some cases, local lobbying registration and disclosure reports, depending on relevant factors, including the amount spent on the activities, whether lobbyists are retained, and the locations of such activities.  

Choosing the Classification of Your Organization

It is critical to correctly determine which tax-exempt status is most appropriate based on your organization’s key objectives.  Failure to apply for and obtain the correct tax-exempt status may subject an organization to unanticipated regulatory burdens and constraints and leave it unable to accomplish its essential goals.  While seeking reclassification of an organization’s tax-exempt status is possible, it can be a slow and complex process. As such, it is best to apply for the most strategically beneficial tax-exempt status from the outset.

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