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Getting started: Is 501(c)(3) status right for your organization?

Purposes. A 501(c)(3) organization (usually a corporation) is one that qualifies for federal income tax exemption under section 501(c)(3) of the Internal Revenue Code. Corporations formed under Washington's Nonprofit Corporation Act do not automatically qualify. A 501(c)(3) organization must be organized and operated exclusively for any combination of the following purposes: religious, charitable, scientific, testing for public safety, literary, educational, to foster amateur sports competition, or for the prevention of cruelty to children or animals. The organization must not devote more than an insubstantial portion of its activities to other purposes (such as operating an unrelated business).

Benefits of 501(c)(3) status

Contributions from individuals and corporations are tax-deductible.
Many private foundations will only make grants to 501(c)(3) organizations.
Organization is exempt from federal (and generally state, if applicable) income tax.
Property tax exemptions may apply.

Restrictions

A section 501(c)(3) organization is subject to a number of restrictions not applicable to business enterprises:

No private benefit or "inurement." There is no prohibition on earning a profit, or surplus. However, funds must not be used to benefit founders, officers, directors, donors, or others involved with management. Rather, any excess of revenues over expenses must be retained by the organization and devoted to the mission.
Limited Lobbying. Lobbying activity is significantly restricted.
Political campaigns. Involvement in political campaigns and communications for or against a candidate are strictly prohibited.

Alternatives to forming a 501(c)(3) organization

Fiscal Sponsorship. Many nonprofit projects initially establish themselves under the supervision and control of a sponsoring organization, rather than as a separate legal entity with its own tax-exempt status. So-called "fiscal sponsorship" allows the founders to devote their efforts initially to getting the program off the ground, rather than spending all their time on administrative matters. The project must fall within the exempt purposes of the sponsoring organization, and the sponsoring organization may charge a fee.
Other categories of tax-exempt organizations. Certain other categories of tax-exempt organizations provide greater flexibility, for example, for lobbying or providing benefits to members. These other categories provide federal income tax exemption, but do not permit tax-deductible contributions and generally are not eligible for property tax exemptions.
For-profit business entity with a social mission. Consider whether the organization can attract investors wishing to invest in a business enterprise with a social mission. A for-profit entity enjoys significantly more operational flexibility, but loses the ability to attract tax-deductible contributions. Will there be sufficient returns?

Contact Lisa Norton for a free initial consultation to discuss the alternatives for achieving your mission.