Forming a 501(c)(4)

This week we are talking about 501(c)(4)s, or social welfare organizations. What are the advantages to starting one?  How are they different than 501(c)(3)s and other types of nonprofits? And what are the important considerations when determining if a 501(c)(4) would be a good vehicle to use to conduct the types of activities you are hoping to engage in to achieve your mission? If you are curious about 501(c)(4)s, what they can do, and how they operate... this podcast episode is for you.

Attorneys for this Episode

Natalie Ossenfort

Susan Finkle Sourlis

Quyen Tu

Shownotes

Scenario:

·      Existing 501(c)(3) has a mission focused on providing potable water to the residents of a community, who are currently unable to tap into a reliable water supply.

·      The city, county, and state have failed to step up, so the 501(c)(3)’s staff raise funds for bottled water that they deliver to the community.

·      What the organization’s founders thought would be a temporary fix, has now been operational for several years, and the water situation is not improving.

·      The 501(c)(3)’s founders want to do more to address the needs of the community, and some are considering starting an affiliated 501(c)(4).

General Rules & Characteristics for 501(c)(3)s:

·      501(c)(3) organizations have a very favorable tax status.

·      They are tax-exempt, and their donors can take advantage of a tax deduction for their contributions.  

·      501(c)(3) public charities are limited in the amount of lobbying (or legislative advocacy) they can engage in, and they are prohibited from engaging in partisan political activity.

Advantages of 501(c)(4)s

·      501(c)(4)s are social welfare organizations.

·      They are tax-exempt organizations that operate for the common good and general welfare of the community.

·      Donations to 501(c)(4)s are not tax-deductible for donors, but...

·      501(c)(4)s can conduct an unlimited amount of lobbying (or legislative) activity, and they can do some partisan work to support or oppose candidates for public office, but that type of activity must remain a secondary activity of the organization.

Scenario:

·      If the 501(c)(3) founders wanted to advocate more aggressively for legislative changes that could provide a long-term solution to their community’s water access problem, they might consider forming a 501(c)(4).

·      How much political (or partisan) activity could the organization conduct? If a 501(c)(4) decides to engage in any partisan political activity, that must be a secondary purpose of the organization and not the primary purpose.

Primary Purpose Activities

·      Issue advocacy and lobbying

o   In our scenario, this could include advocacy in front of the local city council or state legislature for reliable access to water.

o   It could also include ballot measure advocacy.

·      Nonpartisan voter outreach to get out the vote and mobilize the community

·      Conduct research and educate legislators on issues

·      Engage in litigation to defend the rights of their constituents, and more...

Secondary Purpose Activities

·      Candidate endorsements

·      Voter outreach activities using partisan targeting

·      Comparing the organization’s stance on issues to where the candidates stand on those issues

·      Encouraging people to vote for candidates from certain political parties or with certain issue positions, and more...

·      When engaging in this type of activity, a 501(c)(4) must make sure that any partisan work remains a secondary purpose, and it must be mindful of and comply with campaign finance and election laws at the federal, state, and local levels.

Secondary purpose activity... how much is too much?

·      A 501(c)(4) must maintain a primary purpose that is nonpartisan.

·      Tax lawyers differ on what they think is the ideal primary / secondary purpose split.

·      In order to be cautious, a 501(c)(4) could consider keeping its secondary purpose activities to 40% or less.

·      The IRS has created a safe harbor for organizations applying for 501(c)(4) status:

·       60% or more of its total expenditures (including reasonably allocable overhead) and total time (measured by employee and volunteer hours) is devoted to social welfare activity; and

·       less than 40% of its total expenditures and total time is devoted to political campaign activity.

Affiliated Organizations

Some things to keep in mind if a 501(c)(3) wants to form an affiliated 501(c)(4):

• Start-up costs should not come from the (c)(3), but instead should be independently raised for the formation of the (c)(4).
• Once the 501(c)(4) is formed, it should implement a cost-sharing agreement to ensure that no 501(c)(3) resources are being used to impermissibly subsidize (c)(4) work.
• It should implement time tracking systems to ensure that staff and volunteers track their 501(c)(3) and 501(c)(4) work separately.

 

How Would an Existing 501(c)(3) Decide Whether to Form an Affiliated 501(c)(4)?

·      Examine whether your 501(c)(3) public charity is getting close to its lobbying limits, but still wants to do more legislative advocacy.

·      Examine whether there is a need for a more political, and policy focused voice to advocate on your issues and support your communities.

·      Examine whether you want to engage in activities that are prohibited for 501(c)(3)s, but permissible for 501(c)(4)s (support or opposition of candidates)

·      Examine whether you have sufficient financial resources to cover the start-up costs of a 501(c)(4) from sources other than your 501(c)(3), etc.

 

Resources

·      The Connection: Guide to Creating and Operating 501(c)(3)s, 501(c)(4)s, and Political Organizations

·      Comparison of 501(c)(3) and 501(c)(4) Permissible Activities (Factsheet)

·      Navigating the Gray: Tips for working in coalition when the law isn’t clear (Factsheet)

·      Coalition Checklist (Guide)