Understanding the Benefits and Limitations of 501(c)(6) Organizations

Forming a 501(c)(6) might be the next step for your organization. By establishing a 501(c)(6) sooner than later, you can be exempt from paying federal income tax — which, in addition to other benefits — can be the difference between having enough resources to meet your nonprofit’s goals, or putting that money toward taxes. 

However, to qualify as a nonprofit organization under 501(c)(6), your organization must meet certain criteria. It’s also important to fully understand the unique advantages and limitations of this status before structuring your organization this way. 

Chances are, if you’re considering forming a 501(c)(6), then you’re already familiar with the major benefits, like tax exemption. But, there’s more to it. 

What is a 501(c)(6) Nonprofit? 

The term 501(c)(6) refers to a specific section of the U.S. government’s Internal Revenue Code (IRC). The IRC is ultimately a set of laws that govern the taxation system in the United States, consisting of various provisions for tax-exempt organizations, such as nonprofits. 

Organizations that are classified as 501(c)(6) are considered a specific type of nonprofit, which can include business leagues, chambers of commerce, real estate boards, trade associations, and professional football leagues. 

Unlike commercial enterprises, these organizations do not sell goods or services to the general public but use their funds to provide perks and improve the business interests of their members, versus public interests. However, compared to other nonprofit organizations IRC status, 501(c)(3) — which are more focused on charitable, educational, or recreational purposes — 501(c)(6) entities are not tax-deductible as charitable contributions. 

What is a Business League? 

A business league refers to an organization where individuals or businesses with a shared interest come together primarily to advance that interest, rather than to engage in profit-making activities. This includes entities such as trade and professional associations that are supported by membership dues. It’s meant to unite businesses within a geographic area or a specific profession to foster a favorable business environment. An example would be the American Bar Association or the American Medical Association.

Benefits of Forming a 501(c)(6) Organization 

Forming a 501(c)(6) organization offers several strategic advantages. Not only do these entities have tax benefits, but they also enjoy the freedom to engage in lobbying activities that can shape industry-related legislation. These benefits are the primary reason organizations decide to form a 501(c)(6), but they are not the only ones that exist. 

Let’s break down these advantages in more detail: 

Tax-Exempt Status 

First and foremost, organizations that set up a 501(c)(6) structure will be exempt from paying federal income tax. This can lead to thousands of dollars of resources that can be put back into the organization, which would have otherwise gone straight to the U.S. government. 

Membership Fees and Dues 

501(c)(6) organizations require their members to pay fees and dues. While this may seem like a downside, it’s actually a benefit. Those fees help support the financial foundation of the organization. These contributions not only allow the organization to qualify for this status in the first place but also fund the daily operations and strategic initiatives aimed at fulfilling the organization’s purpose. 

Networking and Collaboration 

Whether it’s due to requiring members to pay fees or not, another benefit of forming a 501(c)(6) is that these organizations generally do a good job of providing a robust platform for networking, allowing your members to connect, share resources, and collaborate. It may also create a sense of exclusivity or prestige, prompting more members to inquire, thus growing the organization. 

Lobbying and Advocacy 

Unlike other nonprofit organizations, 501(c)(6) entities are allowed to engage significantly in political lobbying activities. Lobbying helps nonprofit organizations influence public policy in favor of their members’ interests and the interests of the organization as a whole. 

Limitations of 501(c)(6) Organizations 

While 501(c)(6) organizations offer unique advantages, they also face certain limitations that are just as important to familiarize yourself with before forming this structure. By understanding these constraints, you can determine whether this setup is the right choice for your organization now and in the future.

Membership Fees Are Not Tax-Deductible 

One of the major distinctions between 501(c)(6) and 501(c)(3) is that any donations to 501(c)(6) organizations are not tax-deductible as charitable contributions. Essentially, when members pay their dues to the organization, they cannot be considered tax-deductible donations. 

This may deter some people from becoming a member of the organization. However, in cases like the American Bar Association and other similar organizations, those who want to practice law are required to join, regardless. 

Public Benefit vs. Member Benefit 

The primary mission must focus on promoting the common business interests of the members, rather than addressing the needs of the general public. This focus differentiates them significantly from 501(c)(3) organizations, which aim to serve the public good. This is not so much a limitation as it is important to consider when your organization has this distinction. 

Lobbying Regulations 

While 501(c)(6) organizations can lobby, they must adhere to certain restrictions and reporting requirements. If you are classified as a 501(c)(6), you must report your expenditures of that activity to the IRS annually on Form 990, in addition to registering any lobbying activities under the Lobbying Disclosure Act. 

This may discourage some organizations from taking advantage of the benefit of being able to lobby. These regulatory requirements might discourage some organizations from leveraging the full extent of their lobbying privileges. 

Start Your 501(c)(6) with Chisholm Law 

Though it’s clear that forming a 501(c)(6) can be beneficial for your nonprofit organization in terms of tax exemptions, lobbying permissions, and networking opportunities, there’s more to understand before taking that next step. If your organization is considering forming this structure, it’s a good idea to engage with a professional on the matter. This is to get appropriate guidance on the decision and help determine if this is truly the right move for your organization. 

If you’re considering forming a 501(c)(6), let Chisholm Law Firm help. We’re equipped to provide you with comprehensive support on this subject, from initial consultation through to the full establishment of your 501(c)(6). We offer industry-leading legal advice, preparation and filing assistance, and dedicated support to ensure your organization’s needs are met. 

Contact us today for a free consultation to understand what the benefits and limitations of registering as a 501(c)(6) would look like for your organization.

*Past results do not determine future outcomes

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