501(c)(3) organizations have numerous tools at their disposal for achieving their charitable purposes, and also have the distinct advantage of being able to receive contributions that are generally tax-deductible for donors. However, in exchange for tax-exemption and the ability to receive deductible charitable contributions, the law places some limitations on the permissible advocacy-related activities of 501(c)(3) organizations. These limitations have led some 501(c)(3) organizations to make use of affiliated 501(c)(4) social welfare organizations, which are generally subject to fewer limitations and restrictions, to best further their common primary mission.
The limitations associated with 501(c)(3) exempt status include a complete prohibition on engaging in any activities that constitute intervention in a political campaign and a requirement that no more than an insubstantial amount of a 501(c)(3)’s activities constitute lobbying. While we unfortunately do not have a clear definition of “insubstantial” in this context, as we’ve previously written about on this blog, many 501(c)(3) organizations have the option of making the election under IRC Section 501(h) to have their lobbying activities measured based solely on expenditures. Section 501(h) also offers fairly generous thresholds for permissible lobbying expenditures by an electing organization.
Nonetheless, some 501(c)(3)s find that they could more effectively pursue their missions through lobbying or election-related activities beyond those permissible for 501(c)(3)s. In that case, forming an affiliated 501(c)(4) organization may be an attractive option.
Unlike 501(c)(3)s, 501(c)(4) organizations are permitted to engage in an unlimited amount of lobbying activities, provided such activities are in furtherance of the organization’s social welfare purposes. They may also engage in a limited amount of political campaign intervention activities, so long as such activities are secondary to their general social welfare activities. Because of the greater flexibility that 501(c)(4)s have in these areas, they can be a great tool for effectively furthering a social welfare mission.
Considerations Before Forming an Affiliated 501(c)(4)
Once you’ve decided to form an affiliated 501(c)(4), you may find our post on the step by step process for creating a 501(c)(4) helpful. However, before launching into forming a new entity, here are a few things to consider:
- Capacity – In creating a separate 501(c)(4), you are creating a separate legal entity with its own filing, registration, and compliance obligations, and operational needs. The 501(c)(3) should carefully assess whether it has access to the additional capacity necessary to create and run a separate entity.
- Funding – While 501(c)(4)s are exempt from federal income taxes, donations to them are typically not deductible for donors. Accordingly, finding funding for a 501(c)(4)’s activities can be challenging. Before beginning the process of forming an affiliated 501(c)(4), it would be wise for a 501(c)(3) to ensure that the 501(c)(4) will be able to attract sufficient funding to set it up for success, and that the pursuit of such funding will not negatively impact the 501(c)(3)’s ability to fundraise from common donors.
- Affiliation Structure – Because nonprofits do not have any owners, it is not possible to a create a 501(c)(4) “subsidiary” of a 501(c)(3). However, if close affiliation between the two organizations is desired, there are a few options for structuring such affiliation. These structures are usually created in the 501(c)(4)’s Bylaws, which will be subject to the laws of the state in which the entity was incorporated. In California, one option may be to create a voting membership structure with the 501(c)(3) as the sole voting member of the 501(c)(4). Alternatively, the 501(c)(3) could be given the right to designate some or all of the Directors of the 501(c)(4). However, in setting up such an affiliation, the 501(c)(3) will need to be mindful of the need to maintain appropriate separation between the entities, for the purposes of both ascending liabilities and to ensure it does not jeopardize its own tax-exempt status.
- Exemption/Registration – Another distinction between 501(c)(4) and most 501(c)(3) organizations is that 501(c)(4)s may self-declare as exempt from federal income taxes without needing to file an application with the IRS. Many 501(c)(4)s nonetheless choose to file a Form 1024 and obtain recognition of tax-exemption in order to have the assurance that comes with such recognition. In addition, as of mid-2016, organizations intended to operate as exempt under Section 501(c)(4) must file IRS Form 8976 with the IRS no later than 60 days after the organization is formed (see our earlier blog post on this requirement here).
- Maintain Appropriate Separation – Because 501(c)(4)s can engage in activities that 501(c)(3)s may not, it is important that appropriate separation between two such affiliated organization be maintained and that the 501(c)(3) not allow its assets to be used to subsidize the activities of the 501(c)(4) that are prohibited for the 501(c)(3). For example, if the 501(c)(3) wishes to make a grant to an affiliated 501(c)(4), it should be made pursuant to a written grant agreement that clearly requires the funds to be used solely for 501(c)(3)-consistent purposes. Accordingly, a general operating grant from a 501(c)(3) to a 501(c)(4) would not be permissible, even for startup costs, as such a grant could serve to further activities not permissible for the 501(c)(3). A grant made for the stated purpose of supporting the 501(c)(4)’s lobbying activities must be accounted for as a lobbying activity and/or expenditure of the 501(c)(3), and a grant that does prohibit its use for lobbying may also be attributed as a lobbying expenditure by the 501(c)(3). If the two entities will share resources, such as staff or facilities, such sharing should be pursuant to a resource sharing agreement that ensures that the 501(c)(4) pays at least its fair share for the costs of the day-to-day operations of the 501(c)(4).
- Political/Election Laws – Finally, if a 501(c)(4) does engage in lobbying or election-related work, it may be subject to additional election and political laws beyond the tax laws generally discussed in this post. A 501(c)(4) will need to be aware of any such applicable laws in advance of engaging in lobbying or election-related activities in order to ensure compliance. Note that a 501(c)(3) may also be subject to some political and election laws if it engages in certain activities, particularly permissible nonpartisan election-related activities.
In summary, in many instances, creating an affiliated 501(c)(4) can be a highly effective means of furthering an organization’s mission. However, it is important to think through the various considerations in advance to ensure that such an affiliation is proper under the particular circumstances, and will be set up for success.