For groups that are interested in raising money for political work, forming a nonprofit entity can be a good strategy. Special rules govern nonprofit entities that engage in lobbying activities. The familiar 501(c)(3) charity cannot engage in lobbying work without losing its federal tax-exempt status. Groups that plan to do lobbying work therefore should consider forming an entity that complies with the requirements for a 501(c)(4) social welfare organization.
What is a 501(c)(4) social welfare organization?
A 501(c)(4) organization is formed and operated in compliance with the rules and regulations under section 501(c)(4) of the Internal Revenue Code. They have two basic features: they cannot be organized for profit—their earnings cannot be for the benefit of an individual—and they must be operated exclusively to promote social welfare. Under IRS regulations this means “primarily . . . promoting in some way the common good and general welfare of the community.”
A chief benefit of 501(c)(4) entities is that they can engage in lobbying activities without risking their federal tax-exempt status. Lobbying includes advocating for legislation, running public communications campaigns in support of a political position, and preparing model legislation. Note that campaign finance laws impose specific limits on the kinds of activities an organization can engage in around political campaigns (i.e., they cannot operate primarily for the purpose of influencing campaigns).
Forming a 501(c)(4) for political advocacy in California
Although the goal of organizing under 501(c)(4) is largely to receive tax-exempt status for federal purposes, the entities themselves are formed under state law. In California the usual approach is to form a California nonprofit public benefit corporation. When forming a corporation there are lots of hoops to jump through. The first and probably most complicated step is to make a detailed plan. How will the corporation be managed? How will it raise money and what will its expenses be? What will its activities be? The choice of what type of entity to form and which tax classification to pursue should be made only after developing a plan.
Once the plan is in place and a nonprofit corporation looks like the right solution, the organization can move on to organizing the entity itself. Forming a California nonprofit public benefit corporation involves a lot of small details. The basic requirements include:
- Choosing a name and verifying its availability, including evaluating it from a trademark perspective.
- Drafting the corporations’ articles of incorporation, which are filed with the Secretary of State.
- Drafting the corporation’s bylaws, which set out the rules by which the nonprofit will be governed. Properly drafted bylaws are among the most important organizational components of a nonprofit.
- Appointing one or more directors.
- Attending to preliminary organizational matters through a board action, which generally includes appointment of officers, preliminary financial matters (bank accounts, fiscal year), and approval to apply for federal and state tax-exempt status.
- Filing paperwork with the IRS and the state to establish status as a 501(c)(4) social welfare organization and request tax-exempt status. This “step” actually involves several steps, each of which needs to be carefully managed to avoid expensive mistakes.
Talk to a California nonprofit attorney about your plans
At the Church Law Center of California we help religious and political groups get organized and into compliance with state and federal tax requirements. If you are exploring the formation of a political advocacy organization reach out to us today to learn how we can help you. Call us at (949) 689-0437 or reach out to us through our contact page.