501c6 vs 501c3: What’s the Difference?

Dec 21, 2023 

Disclaimer: Although we don’t provide financial advice, we can assist you with your filings and corporate documents and help you apply for 501(c)(3) status under the Internal Revenue Code* (IRC). Visit our service pages to find out more about what Pearl Solutions can offer. 

Definition of 501(c)(6) vs 501(c)(3)

If you’re in the nonprofit development and creation process or you’re starting your own mission-driven organization, you’ve got a lot on your plate. You might be tempted to hold off on reading a blog post about 501(c)(6) vs 501(c)(3) organizations. 

We understand that instinct. However, we believe that now is the best time to learn about the two types of organizations. 

Why? Well, ask yourself these questions: Do you want your organization to receive tax-exempt status? Do you want donations to your organization to be tax-deductible? The answer is likely yes to both. 

In order for those two things to be possible, your organization will need to apply for and receive tax-exempt status from the Internal Revenue Service (IRS). The IRS makes this decision by adhering to section 501 of the Internal Revenue Code (IRC). This is where the 501(c)(6) and 501(c)(3) designations** come into play. 

The subsections in section 501 describe the types of organizations that qualify for tax-exempt status. This includes, for example, subsection 501(c)(3), which is the section under which most nonprofits achieve their tax-exempt status. However, that’s not the case for all nonprofits or mission-driven organizations. Some organizations may receive tax-exempt status under another subsection. 

That’s why it’s important to know the difference between subsection 501(c)(3) and the other subsections: You need to determine under which subsection your organization might receive tax-exempt status.

In this blog post, we’ll discuss the differences between 501(c)(6) and 501(c)(3) organizations. We’ll also talk about exemption purposes—what your organization’s purpose is—and how your organization’s purpose informs your application for tax-exempt status. Finally, we’ll list examples of 501(c)(6) and 501(c)(3) organizations so you can see what types of organizations qualify for exemption under those subsections. 

Differences Between 501(c)(6) and 501(c)(3) Organizations

We’ve provided an overview of 501(c)(6) and 501(c)(3) organizations below. As you’ll see, there are several important factors that distinguish 501(c)(6) organizations from 501(c)(3) organizations. If you want to see a more comprehensive breakdown, take a look at this blog post from Donorbox. 

501(c)(6) Organizations

Overview

This is what the IRS says about organizations exempt under section 501(c)(6):

“Section 501(c)(6) of the Internal Revenue Code provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues, which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.”

Purpose

In order to determine which subsection your organization falls under, you need to look at its purpose. More importantly, you need to understand how the IRS categorizes your organization. 

For example, the IRS defines a business league as “an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit.” The term business is “broadly construed,” which means the IRS includes professions like mercantile and trading businesses. You can find examples of common business interests here.

Additionally, a business league’s activities “must be devoted to improving business conditions of one or more lines of business as distinguished from performing particular services for individual persons.” 

Political Activity and Lobbying

Some subsections restrict organizations from political activity and lobbying. 501(c)(6) organizations have more freedom in this regard: 

An organization that otherwise qualifies for exemption under Internal Revenue Code section 501(c)(5) or 501(c)(6) will not be disqualified merely because it engages in some political activity. In addition, these organizations may engage in lobbying that is germane to accomplishing their exempt purposes without placing their exemption in jeopardy. An organization (other than a labor organization) that engages in these activities may need to give members notice of dues used for such activities, or be subject to a proxy tax on the amount of the expenditures.

Tax-Exempt Status

Organizations that meet the requirements laid out in this section are considered 501(c)(6) tax-exempt organizations.

While section 501(c)(6) organizations have their tax-exempt status, donations to those organizations are not tax-deductible

“Contributions to section 501(c)(6) organizations are not deductible as charitable contributions on the donor’s federal income tax return. They may be deductible as trade or business expenses if ordinary and necessary in the conduct of the taxpayer’s business. The donee organization may be required to make certain disclosures and pay a proxy tax in connection with the dues payment, however.”

Membership Fees and Dues

To achieve tax-exempt status under section 501(c)(6), organizations must receive “meaningful” membership support

In regards to membership composition, the IRS states:

“A business league exempt under Code section 501(c)(6) organization is a membership organization characteristically supported by dues. Although an organization may receive a substantial portion or even the primary part of its income from non-member sources, membership support, either in the form of dues paid to or involvement in the organization’s activities, must be meaningful.”

Dues are not usually considered when measuring meaningful membership support.

Examples

As noted above, these organizations are usually business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues. Examples of 501(c)(6) organizations include the U.S. Chamber of Commerce and the Academy of Television Arts & Sciences.

501(c)(3) Organizations

Overview

According to the IRS, in order to be tax-exempt under section 501(c)(3) of the IRC: 

“…an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.”

Purpose

The exempt purposes of organizations that receive tax-exempt status under this section include: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. 

Political Activity and Lobbying

Here’s what the IRS says about the restrictions placed upon 501(c)(3) organizations when it comes to political activity and lobbying:

“Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely 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. Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity.” 

Organizations that violate these restrictions may be denied tax-exempt status or have their tax-exempt status revoked.

Tax-Exempt Status

Organizations that meet the requirements described in section 501(c)(3) are considered tax-exempt organizations. A key difference between 501(c)(6) organizations and 501(c)(3) organizations is that most donations to 501(c)(3) organizations are tax-deductible. This also means that 501(c)(3) organizations have to disclose more information about donors and donations than 501(c)(6) organizations.

Membership Fees and Dues

Although organizations covered under section 501(c)(3) are not membership organizations, they may have members and charge membership fees. However, the organizations must receive “no more than one-third of its support from gross investment income and more than one-third of its support from contributions, membership fees, and gross receipts from activities related to its exempt functions.” 

Per the IRS, examples could include a parent-teacher organization or an arts group with box office revenue.

Examples

As mentioned above, most organizations that we consider to be nonprofits or charities achieve their tax-exempt status under section 501(c)(3). Examples of 501(c)(3) organizations include Doctors Without Borders (Médecins Sans Frontières), Feeding America, Boys & Girls Clubs of America, American Heart Association, and World Wildlife Fund Inc. 

If you’re looking for a quick way to determine if a nonprofit is a 501(c)(3) organization and your donation is tax-deductible, scroll to the bottom of their website. They often include that information in the footer. 

For example, this is what you’ll see at the bottom of the World Wildlife Fund Inc.’s website: 

World Wildlife Fund Inc. is a nonprofit, tax-exempt charitable organization (tax ID number 52-1693387) under Section 501(c)(3) of the Internal Revenue Code. Donations are tax-deductible as allowed by law.

This is what you’ll see at the bottom of the Boys & Girls Clubs of America’s website: 

BGCA is a 501(c)(3) (nonprofit) organization and donations are tax deductible.

This is what you’ll see at the bottom of the American Heart Association’s website: 

The American Heart Association is a qualified 501(c)(3) tax-exempt organization.

This is what you’ll see at the bottom of Feeding America’s website: 

Feeding America is a 501(c)(3) non-profit recognized by the IRS.

The Doctors Without Borders website includes the nonprofit’s Federal tax ID number in the footer. On the Ways to Give page, they confirm that the organization has 501(c)(3) status: 

Doctors Without Borders USA, Inc. is recognized as an international nonprofit organization/NGO under the Internal Revenue Code section 501(c)(3).

If you want to make sure your donation is tax-deductible but can’t find the information in the footer of the website or in the organization’s FAQ section, we recommend getting in touch with someone who works at the organization and asking them.

If you’re looking to start a mission-driven organization, we’d love to hear from you. Our team can assist you with your filings and corporate documents, including helping you apply for 501(c)(3) status under the IRC. You can learn more about the nonprofit creation and development services we provide at Pearl Solutions here.

*The IRC is overseen by the Internal Revenue Service, which is a bureau of the Department of the Treasury that operates as a tax administrator.

**You may also see these designations without the parentheses: 501c6 and 501c3.

If you’re looking to apply for and win a world-changing grant, we’d love to support you. Learn more about the grant proposal writing services we provide at Pearl Solutions. 


chevron-down