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Why do many nonprofits choose 501(c)3 status?

On Behalf of | Jul 27, 2021 | Nonprofits |

Though there are multiple business structures available to charitable startups, most choose to pursue 501(c)3 status over other alternatives. According to Forbes, more than 1.6 million nonprofits are 501(c)3 organizations and include environmental groups, food banks, religious entities and social service providers.

A number of advantages make this classification popular for nonprofit organizations.

Tax exemptions

501(c)3 public charities are exempt from federal corporate income tax and often equivalent state and local taxes, as well. The reduced tax burden allows nonprofit entities to devote more funds to operations.

People who donate money to a tax-exempt charity, such as a 501(c)3 entity, can deduct the value of their contribution from their own taxes. This incentive often encourages people to choose tax-exempt organizations over others.

Exclusive opportunities

Many corporations, foundations and government programs that provide grants and other opportunities restrict their dealings to 501(c)3 public charities. These restrictions are often for tax purposes but may also help to ensure that recipients are in good standing.

Legitimacy

Due to the thorough application process, this prevalent tax status lends added legitimacy to any business that holds it. Additionally, the filings of 501(c)3 entities are open to the public, helping to ensure that such organizations operate in good faith.

Some nonprofits choose to forgo 501(c)3 status due to a desire to maintain control or misalignment with their organizational goals. Additionally, IRS compliance may pose a significant challenge to some charities. An advocate can help new nonprofit startups understand the best business structure for their unique mission.