What Is a 501(c)(3) and How Do You Get One?

A 501(c)(3) organization is a nonprofit entity recognized under the U.S. Internal Revenue Code. The Internal Revenue Service (IRS) grants this designation to corporations, trusts, and unincorporated associations that are organized and operated for specific exempt purposes. This status provides two main benefits: the organization is exempt from paying federal income tax, and donors can claim a tax deduction for their contributions.

These entities include what people think of as charities, churches, and educational institutions. The ability to offer tax deductions to donors is a fundraising tool that encourages public and corporate support, helping these organizations fund their programs.

Core Requirements for Qualification

To qualify for 501(c)(3) status, an organization must satisfy two evaluations administered by the IRS: the Organizational Test and the Exempt Purpose Test. The Organizational Test focuses on the legal structure and foundational documents of the entity. An organization must be legally formed as a corporation, a trust, or an unincorporated association.

Its organizing documents must contain specific language that limits its purposes to those deemed exempt. A component of this test is the permanent dedication of assets. The founding documents must include a dissolution clause, which ensures that if the organization ever ceases to operate, its remaining assets will be distributed to another 501(c)(3) organization or for a public purpose.

The second requirement is the Exempt Purpose Test, which examines the mission and activities of the organization. To pass this test, the organization must be operated exclusively for one or more of the purposes listed in the statute, which include:

• Charitable
• Religious
• Educational
• Scientific
• Literary
• Testing for public safety
• Fostering national or international amateur sports competition
• The prevention of cruelty to children or animals

The term “charitable” is broadly defined to include activities such as relieving poverty, advancing education, and lessening the burdens of government. At the time of application, an organization is also classified as either a public charity or a private foundation, a distinction based on its sources of funding. A public charity receives a significant portion of its financial support from the general public or government grants, while a private foundation derives its funding from a small number of sources, such as an individual or a family, and often makes grants to other charities.

Prohibited Activities and Operational Constraints

Operating as a 501(c)(3) organization comes with limitations on certain activities to ensure the entity serves public interests. A primary constraint is the prohibition against private inurement, which means that none of the organization’s net earnings may benefit any private shareholder or individual. This rule applies to insiders—people with influence over the organization, such as founders or directors.

Beyond inurement, there is a broader restriction on private benefit. An organization must not be operated for the benefit of private interests, even if those individuals are not insiders. An example of a prohibited private benefit would be a conservation organization using its funds to primarily improve the property value of a single, private landowner.

Another operational constraint involves legislative activities, known as lobbying. A 501(c)(3) organization is permitted to engage in some lobbying, but these activities cannot constitute a substantial part of its overall functions. The IRS uses different tests to determine what is substantial, but it involves evaluating the time and money spent on attempts to influence legislation.

Finally, there is a prohibition on political campaign intervention. A 501(c)(3) organization may not participate in or intervene in any political campaign on behalf of or in opposition to any candidate for elective public office. This ban includes making financial contributions to a campaign or endorsing a candidate, and a violation can lead to the revocation of tax-exempt status. However, non-partisan activities like voter registration drives are permissible.

Information and Documents Needed for Application

Before an organization can formally apply for 501(c)(3) status, it must gather a set of documents and information. The first step is to obtain an Employer Identification Number (EIN) from the IRS. An EIN is a unique nine-digit number that identifies the business entity for tax purposes and is a prerequisite for filing the application.

The core of the application package is the organization’s legal organizing document. For a corporation, this is the Articles of Incorporation, which must be filed with and certified by the appropriate state agency. This document must contain specific clauses required by the IRS, including a statement of exempt purposes and a dissolution clause.

In addition to the organizing document, the organization’s bylaws are also required if they have been adopted. Bylaws are the internal operating rules for the organization, and a well-drafted conflict of interest policy is also a supporting document that demonstrates good governance.

A substantial part of the application involves detailing the organization’s work and finances. The applicant must provide a narrative describing its past, present, and planned activities, and provide financial data. This includes statements of revenue and expenses for previous years or a projection for the next three years if it is a new entity.

All of this information is compiled to complete either IRS Form 1023 or the streamlined Form 1023-EZ. Form 1023-EZ is available to smaller organizations that anticipate less than $50,000 in annual gross receipts and have less than $250,000 in total assets.

The Application and Determination Process

Once an organization has gathered all necessary documents and completed the appropriate application form, the next phase is submission and review by the IRS. The entire application package must be submitted electronically through the Pay.gov portal, as paper applications are no longer accepted. At the time of submission, the organization must also pay a non-refundable user fee, which is currently $600 for Form 1023 and $275 for Form 1023-EZ.

After the submission is complete, the IRS will send an acknowledgment of receipt. The application is then assigned to an IRS agent in the Exempt Organizations division for review, which can take from three to six months, and sometimes longer if the application is complex. During this period, the assigned agent may contact the organization with follow-up questions or requests for additional information.

The process concludes when the IRS issues a formal determination letter. A favorable determination letter is the official document that confirms the organization’s exemption from federal income tax. If the IRS denies the application, it will issue an adverse determination letter explaining the reasons for the denial, at which point the organization has the right to appeal the decision.

Maintaining Tax-Exempt Status

Receiving a favorable determination letter from the IRS does not end an organization’s obligations. To keep its 501(c)(3) status, an organization must adhere to ongoing compliance requirements, primarily the annual filing of an informational return with the IRS. This report on finances and activities ensures compliance and provides public transparency.

The specific form an organization files belongs to the Form 990 series and depends on its financial activity.

• Form 990-N, the e-Postcard, is for small organizations with gross receipts of $50,000 or less.
• Form 990-EZ is for organizations with gross receipts under $200,000 and total assets under $500,000.
• The full Form 990 is for larger organizations.
• Private foundations file Form 990-PF.

Filing the correct Form 990 by the deadline, the 15th day of the fifth month after the end of the organization’s fiscal year, is mandatory. A failure to file for three consecutive years results in the automatic revocation of tax-exempt status. Beyond federal filing, organizations must also be mindful of state-level compliance, as most states have their own registration and reporting requirements for charitable organizations.