Formation and Control of a 501(c)(3) Affiliate

A 501(c)(3) organization may under proper circumstances be formed and controlled by a 501(c)(4) organization.  In order to receive separate tax treatment, the 501(c)(3) must be formed as a separate entity distinct from the 501(c)(4) organization, with a separate federal employer identification number and separate purposes, governing documents, bank accounts, financial records and board of directors.


There are several ways a 501(c)(4) might establish control over its 501(c)(3) affiliate, including the following:

  1. Common board of directors.  The directors of the 501(c)(4) organization may also be directors of the 501(c)(3) affiliate by virtue of their positions as directors of the 501(c)(4) organization.
  2. Power to appoint directors of the 501(c)(3) affiliate.  The bylaws of the 501(c)(3) affiliate may provide for the right of the 501(c)(4) organization to appoint all (or a majority) of the directors of the 501(c)(3) affiliate.
  3. Sole member of the 501(c)(3) affiliate.  The 501(c)(4) organization may the sole member, with the associated right to vote for the board members, of the 501(c)(3) affiliate (which must be a membership corporation).

Board of Directors

As may be inferred from the preceding section, although the boards of the affiliated 501(c)(3) and 501(c)(4) organizations (collectively, the "Affiliated Organizations") are separate, it is permissible to have the same directors on each board.  However, it is generally thought to be advantageous (although not required) to have some unique directors on the board of the 501(c)(3) affiliate who do not also serve on the board of the 501(c)(4) organization in order to demonstrate that the boards are truly separate and that the organizations are distinct and deserving of separate tax treatment.

Shared Resources

The Affiliated Organizations may share employees, facilities, equipment and other overhead items, provided that each organization pays its share of salary, rent and other shared expenses.  If certain resources are to be shared, it is generally advisable for the Affiliated Organizations to enter into an appropriate cost sharing agreement.

The Affiliated Organizations may share a joint website if it is carefully structured and each of the Affiliated Organizations pays its appropriate share of the cost.  If the 501(c)(4) organization engages in partisan electoral activities, such content should be clearly separated from the 501(c)(3) organization’s portion of the website because the 501(c)(3) organization is prohibited from engaging in such activities and the IRS will likely examine the website to determine whether the Affiliated Organizations are truly independent.

Grants from the 501(c)(3) Organization to the 501(c)(4) Organization

The 501(c)(3) organization may make grants to its affiliated 501(c)(4) organization ("Grants"); provided, however, that the Grants are used exclusively to further the 501(c)(3) organization’s exempt purposes.  If the Grants are used by the 501(c)(4) organization to engage in lobbying, the amounts of such Grants will be counted against the 501(c)(3) organization’s lobbying limits.

Depending on its exempt purposes, the 501(c)(3) organization may be able to further such purposes by engaging in activities that are educational in nature.  Accordingly, the 501(c)(3) organization may be able to use its funds to produce and disseminate educational materials, subject to the lobbying and electioneering restrictions.  However, if such materials are produced primarily for the benefit of the 501(c)(4) organization to advance its lobbying efforts, such expenditures by the 501(c)(3) organization may be counted against its lobbying limits.  This may be true even if preparation and dissemination of the material would not otherwise be considered as lobbying by the 501(c)(3) organization because they fall within an exception for examinations and discussions of broad social, economic and similar problems, and do not themselves refer to specific legislation.  However, because of the 501(c)(4) organization’s subsequent use of such materials to engage in lobbying, the 501(c)(3) organization’s expenditures on such materials may be viewed as merely prepatory for the legislative effort and therefore lobbying.

Because the 501(c)(3) is prohibited from engaging in certain activities, such as partisan electoral activities, the Grants should not be made to cover the general operating or fundraising expenses of the 501(c)(4) organization.  Otherwise, the 501(c)(3) organization may be viewed as making an impermissible expenditure.  Accordingly, any Grants should be made pursuant to a grant agreement that provides certain conditions for such Grant.  For example, the grant agreement must prohibit the 501(c)(4) organization from expending any part of the Grant on partisan electoral activities.  In addition, if the grant agreement allows for any part of the Grant to be used for lobbying and the 501(c)(3) organization has made the 501(h) expenditure test election, it should specify how much of the Grant may be used for direct and grassroots lobbying.  Without such restriction, any amount of the Grant spent on lobbying will count against the 501(c)(3) organization’s grassroots lobbying limit.

In order to ensure that a Grant is used to further the 501(c)(3) organization’s exempt purpose, the 501(c)(3) organization must oversee the 501(c)(4) organization’s use of such Grant.  This is typically done by requiring the 501(c)(4) organization to provide periodic reports to the 501(c)(3) organization detailing with specificity its use of the Grant.  The 501(c)(3) organization should ensure that the reports reflect the proper use of the Grant pursuant to the grant agreement.