According to the National Center for Charitable Statistics, there are over 1 million groups with 501(c)(3) charitable status operating in the United States. Given that these charitable nonprofit organizations may have the substantial contact with populations in need, they carry the potential to be an influential factor in raising grassroots efforts and voices in the public policy process especially during an election-year. While 501(c)(3) organizations may engage in a fair amount of lobbying without violating the prohibition against substantial lobbying (particularly, with respect to smaller and medium sized organizations, if they make the 501(h) election), they may not engage in any political campaign activity.

Organizations with substantial lobbying and/or political aims may instead be set up as 501(c)(4) organizations (commonly referred to as “social welfare organizations”), which are given more leeway than charitable organizations. They may engage in substantial lobbying “germane to the organization’s programs” as a “permissible means of attaining [a] social welfare purpose,” but must generally refrain, as a principal activity, from “direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.” Although 501(c)(4) organizations are more able to engage in political activity, they generally face more obstacles in raising the necessary capital to fund their purposes than 501(c)(3) organizations, which, unlike 501(c)(4)s, can receive tax-deductible contributions and generally receive more foundation grants.

The debate over legally permissible political activity is nothing new to the nonprofit sector. In 2005, the then deputy directory of the National Committee of Responsive Philanthropy (NCRP), Jeff Krehely, wrote an article, Maximizing Nonprofit Voices and Mobilizing the Public, addressing how nonprofit organizations can exploit the respective advantages of 501(c)(3)s and 501(c)(4)s by establishing affiliate 501(c)(3) and 501(c)(4) organizations. The former organization raises capital to help “develop the institutional expertise required to establish and manage” the latter affiliated organization. Having both types in an affiliated structure, in conjunction with “carefully managing the flow of money and staff between the two organizations,” allows groups to “receive tax-deductible donations and foundation gifts and continue to lobby extensively without violating the law.”

Organizations such as the Sierra Club, ACLU, and NRA already operate with a 501(c)(3)/501(c)(4) affiliated structure. Establishing such hybrid organizations is not impossible, but as Krehely warns, if taken on carelessly, could violate tax laws and jeopardize their tax-exempt statuses. Organizations must have a sound budget in place, ready to support the legal and accounting expertise necessary: “the better financed an organization is, the more likely it is to have the counsel needed to establish affiliated organizations and run them effectively and legally.” In the end, Krehely believes this investment of resources is a necessary and worthwhile price to pay “if organizations want to effect permanent, systemic changes” because organizations need to “be prepared to advocate… for their causes and constituencies.”

If an organization wants to engage in even more political activity than allowed for 501(c)(4)s, it has the additional option to establish a political action committee (PAC) which is allowed direct involvement in state and national elections thought monetary contributions to candidates. To have all three, Krehely states, is “the best of all worlds.”

Krehely’s article is available in PDF format here.

For more information on affiliated 501(c)(3) and 501(c)(4) organizations, visit the previous post on Formation and Control of a 501(c)(3) Affiliate.

Additional information is also available at the Alliance for Justice comparison chart, and sample cost-sharing agreement publications.

- Emily Chan

Comments

  1. This is great info. I always advise my clients to stay clear of the “fine line” in interpretation of “no substantial portion of activities” in lobbying. :)
    http://www.charitynetusa.com

  2. Alex says:

    What percentage of the mebership of a 501 c 3 organization is need for a quorum in the eyes of the IRS?

  3. Manuel Torres says:

    Does working for a 501(c)(3) and 501 (c)(4) prohibit me from volunteering for political campaigns?
    My current employer alleges that it is and that i would have to come off payroll, basically ending my employment, if I did.
    For some reason it doesn’t feel right. Is that true?

  4. Dan says:

    Thanks for the excellent info. Had a question — have you seen (or know of any rules addressing) a 501(c)(3) sharing its annual budget report with its affiliated 501(c)(4) (eg, a single report that includes separate columns for each entity)?