501C3 Organization Rules

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The IRS monitors compliance with Section 501(c)(3) rules.
The IRS monitors compliance with Section 501(c)(3) rules. (Image: Thinkstock/Comstock/Getty Images)

There are many advantages to setting up a Section 501(c)(3) organization, also known as a charitable organization. Charitable organizations do not pay federal income tax, and benefactors who donate money to 501(c)(3) entities can deduct their contributions from their federal income taxes. The IRS regulates 501(c)(3) organizations to ensure that only legitimate charities can take advantage of these tax breaks.

Organizational Structure

The IRS recognizes three types of business structures as qualifying for 501(c)(3) status: trusts, corporations and associations. In a trust, one person holds property subject to an obligation to use or keep the property for another. A corporation is a business entity that shareholders form by following their state's procedure for incorporation. An association is a group of individuals that organize for a specific purpose. Articles of incorporation and articles of association must contain specific language to qualify as Section 501(c)(3) organizations.

No Private Interest

One requirement of a 501(c)(3) organization is that no private shareholder or individual--no one with a personal, private interest in the organization's activities--may benefit from the organization's net profits. The private benefit rule makes it clear that neither the creator of the organization nor the creator's family members or designees should have a financial interest in the nonprofit organization's earnings after expenses.

Political Restrictions

Federal regulations restrict the the amount of political lobbying activities that a nonprofit organization can conduct. Section 501(c)(3) organizations cannot directly or indirectly participate or intervene in a political campaign for or against any political candidate. Nonpartisan activities such as publishing voter education guides and encouraging voter registration are not prohibited, as long as they do not favor or oppose one candidate or another.

Noncompliance Penalties

The IRS monitors organizations for compliance with Section 501(c)(3) rules, and the consequences for noncompliance can be harsh. The IRS can deny or revoke a noncompliant organization's tax exempt status. It can also impose excise taxes on an organization based on a percentage of the excess benefit the organization gained.

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