A 501(c)(3) organization may under proper circumstances be formed and controlled by a 501(c)(4) organization.  In order to receive separate tax treatment, the 501(c)(3) must be formed as a separate entity distinct from the 501(c)(4) organization, with a separate federal employer identification number and separate purposes, governing documents, bank accounts, financial records and board of directors.

Control

There are several ways a 501(c)(4) might establish control over its 501(c)(3) affiliate, including the following:

  1. Common board of directors.  The directors of the 501(c)(4) organization may also be directors of the 501(c)(3) affiliate by virtue of their positions as directors of the 501(c)(4) organization.
  2. Power to appoint directors of the 501(c)(3) affiliate.  The bylaws of the 501(c)(3) affiliate may provide for the right of the 501(c)(4) organization to appoint all (or a majority) of the directors of the 501(c)(3) affiliate.
  3. Sole member of the 501(c)(3) affiliate.  The 501(c)(4) organization may the sole member, with the associated right to vote for the board members, of the 501(c)(3) affiliate (which must be a membership corporation).

Board of Directors

As may be inferred from the preceding section, although the boards of the affiliated 501(c)(3) and 501(c)(4) organizations (collectively, the "Affiliated Organizations") are separate, it is permissible to have the same directors on each board.  However, it is generally thought to be advantageous (although not required) to have some unique directors on the board of the 501(c)(3) affiliate who do not also serve on the board of the 501(c)(4) organization in order to demonstrate that the boards are truly separate and that the organizations are distinct and deserving of separate tax treatment.

Shared Resources

The Affiliated Organizations may share employees, facilities, equipment and other overhead items, provided that each organization pays its share of salary, rent and other shared expenses.  If certain resources are to be shared, it is generally advisable for the Affiliated Organizations to enter into an appropriate cost sharing agreement.

The Affiliated Organizations may share a joint website if it is carefully structured and each of the Affiliated Organizations pays its appropriate share of the cost.  If the 501(c)(4) organization engages in partisan electoral activities, such content should be clearly separated from the 501(c)(3) organization’s portion of the website because the 501(c)(3) organization is prohibited from engaging in such activities and the IRS will likely examine the website to determine whether the Affiliated Organizations are truly independent.

Grants from the 501(c)(3) Organization to the 501(c)(4) Organization

The 501(c)(3) organization may make grants to its affiliated 501(c)(4) organization ("Grants"); provided, however, that the Grants are used exclusively to further the 501(c)(3) organization’s exempt purposes.  If the Grants are used by the 501(c)(4) organization to engage in lobbying, the amounts of such Grants will be counted against the 501(c)(3) organization’s lobbying limits.

Depending on its exempt purposes, the 501(c)(3) organization may be able to further such purposes by engaging in activities that are educational in nature.  Accordingly, the 501(c)(3) organization may be able to use its funds to produce and disseminate educational materials, subject to the lobbying and electioneering restrictions.  However, if such materials are produced primarily for the benefit of the 501(c)(4) organization to advance its lobbying efforts, such expenditures by the 501(c)(3) organization may be counted against its lobbying limits.  This may be true even if preparation and dissemination of the material would not otherwise be considered as lobbying by the 501(c)(3) organization because they fall within an exception for examinations and discussions of broad social, economic and similar problems, and do not themselves refer to specific legislation.  However, because of the 501(c)(4) organization’s subsequent use of such materials to engage in lobbying, the 501(c)(3) organization’s expenditures on such materials may be viewed as merely prepatory for the legislative effort and therefore lobbying.

Because the 501(c)(3) is prohibited from engaging in certain activities, such as partisan electoral activities, the Grants should not be made to cover the general operating or fundraising expenses of the 501(c)(4) organization.  Otherwise, the 501(c)(3) organization may be viewed as making an impermissible expenditure.  Accordingly, any Grants should be made pursuant to a grant agreement that provides certain conditions for such Grant.  For example, the grant agreement must prohibit the 501(c)(4) organization from expending any part of the Grant on partisan electoral activities.  In addition, if the grant agreement allows for any part of the Grant to be used for lobbying and the 501(c)(3) organization has made the 501(h) expenditure test election, it should specify how much of the Grant may be used for direct and grassroots lobbying.  Without such restriction, any amount of the Grant spent on lobbying will count against the 501(c)(3) organization’s grassroots lobbying limit.

In order to ensure that a Grant is used to further the 501(c)(3) organization’s exempt purpose, the 501(c)(3) organization must oversee the 501(c)(4) organization’s use of such Grant.  This is typically done by requiring the 501(c)(4) organization to provide periodic reports to the 501(c)(3) organization detailing with specificity its use of the Grant.  The 501(c)(3) organization should ensure that the reports reflect the proper use of the Grant pursuant to the grant agreement.

Comments

  1. KH says:

    Does the same advice apply to a 501(c)(3) that is to be controlled by a 501(c)(6) business league?

  2. Gene Takagi says:

    Much of the information in the post would be relevant to a 501(c)(3) affiliate of a 501(c)(6). You should not, however, consider the post as legal advice. I highly recommend retaining an attorney with relevant experience on such affiliate structures. The post just touches on some of the issues.

  3. A. M. Karim says:

    Can a 501c4 organization contribute funds to a 501c3 organization? Under what conditions?

  4. Gene Takagi says:

    A 501(c)(4) can contribute funds to a 501(c)(3) organization, whether or not the latter organization is an affiliate. The 501(c)(4) must ensure that the contribution is in furtherance of its own exempt purposes. Of course, the 501(c)(3) must also ensure that the contribution is not restricted to developing or operating activities prohibited to the 501(c)(3). If the contribution is running the other way (i.e., from the 501(c)(3) to the 501(c)(4)), there will be more diligence required (seek experienced counsel).

  5. Trisha says:

    I work for a non-partisan c4 with a separate c3 foundation. We are a civic league that does not engage in any election work and raises a lot of funds for charities in our communities. Are there any other rules for using our c3 to write/receive foundation grants outside of the regulations on election work on the part of the c4? All of our purposes are educational in nature, while some of the education is for our members (which pay nominal dues) rather than the community at large.

  6. Gene Takagi says:

    This is difficult to answer in a short post without additional facts. At minimum, be aware that if the c3 grants funds to the c4 and such funds are used for lobbying, the lobbying will be attributed to the c3 for purposes of determining whether the c3 has engaged in substantial lobbying. You may also have private benefit issues with education provided just to members. I recommend obtaining the advise of an EO attorney on these issues.

  7. Tanya Levin says:

    Hi,
    I work with a 501c3 organization that *intended* to set up an affiliated 501c4 organization. With a change in leadership, we continued on with lobbying without realizing that the 501c4 was never set up. We now have lobbying money, but no 501c4. Will we have a problem if our 501c3 accepts the money until the c4 is set up ?
    Thanks for your thoughts !

  8. Laurie says:

    1. Can you point me to any example bylaws for a C3 and C4 affiliate?
    2. Does the word “affiliate” need to be included in the documentation anywhere or is it implied?
    3. Does it matter which nonprofit you make the affiliate? For example, we are forming a Civic Organization c4, and would like a “Friends of city” c3. Would the c3 be the affiliate of the c4?

  9. Tricia says:

    Do the same rules apply for a 501c6 with a c3 affiliate?

  10. Gene Takagi says:

    Tanya, the c3 is subject to the substantial lobbying limits (see lobbying posts).

  11. Gene Takagi says:

    Laurie, the word “affiliate” does not need to appear in the bylaws. The organizations’ bylaws may reflect the affiliation through one of the control mechanisms discussed in the post. If set up through a right to appoint directors, either the c3 or c4 may be the “parent” organization depending on the specific facts and circumstances.

  12. Gene Takagi says:

    Tricia, see the second comment in this string.

  13. Sari says:

    Can the Executive Director of a c3 also serve simultaneously as the ED of a c4 that might engage in politically partisan activities?
    If the ED gets a lot of media coverage from her service for the c4, what risks are there, if any, to the c3, if some of the media coverage reflects partisan points of view?

  14. judy david says:

    Do you offer any guidelines on how to set up individual chapters within a 501(c)3? i.e.: organizations within the 501(c)3 at the county level in our region. Just wondering whether or not our 501(c)3 needs to amend its Bylaws to provide for future establishment of these chapters.

  15. Ramiro says:

    Is it best to open both c3 and c4 simultaneously or do one before the other

  16. Dan says:

    Gene, thanks for the excellent website, always useful 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)?

  17. Gene Takagi says:

    Sari, I’ve seen several situations where the ED of the c3 serves as ED of the c4. Many of my colleagues believe this may be okay so long as the c4 is sufficiently reimbursing the c3 for the individual’s service (which raises other issues) and separation between the two entities is respected. I’m a little sceptical about such arrangements over the long term. I think it may be improper for the c3 to contract out services of its employees specifically to engage in activities not permitted to the c3, particularly if contracting out such services is a substantial activity of the c3.

  18. Gene Takagi says:

    Ramiro, there’s no one-size-fits-all answer to your question. It depends on, among other things, how the organizations are affiliated (e.g., which of the two organizations has the right to appoint the directors of the other organization) and where the initial funding will be directed.

  19. Sara Collins says:

    I am on the Board of a local animal shelter. The Board’s majority is controlled by the Director, who is a paid employee. The majority of the board will vote out anyone who questions budget, finances, or benefits. The Director, who is paid employee, has hired his wife and children. All of these employees have their health insurance paid in full by the Humane Society. There are many abuses going on that the rest of the Board cannot address because we are in the minority. Is the Health Insurance issue legal? How do we take back control of this Board and resolve issues that we feel are illegal and may jeopardize the society as a whole? thank you

  20. Sara Collins says:

    Also, who, if anyone, does a 501(c)(3) have to answer to?

  21. Gene Takagi says:

    Sara, typically, your state’s Attorney General (AG) and the IRS (with respect to its tax-exempt status). With respect to your earlier comment (which will be deleted because it is not related to the post), I suggest that you recommend the organization to retain the counsel of an experienced attorney to see if there are violations. You’ll want to proceed carefully before initiating a complaint with the AG, the IRS, or the courts.

  22. Congratulations on your page, it is really interesting

  23. great info i cant believe i love your written style

  24. Tammy says:

    I am an officer & on the board of a corporation that was formed in January. Our 501c3 status has not yet come through yet. Our CEO recently resigned. We obtained another, but now the old one has blocked us from our website and taken the domain names, even though she submitted the bill for the domains for reimbursement. She was hosting the website at a place that she paid 1/2 for and that another board member paid half for. We asked her how she wanted to handle that when she quit and she said we would do our deal, she would do hers, and that would be that. Now she took our site down and altered passwords so we cant even move to another host site. We cant start over unless we have the domain name ownership either. We have worked for months to get this going and don’t want to loose all our work. What legal recourse do we have? btw Our current board is already registered with the State of Ca.

  25. Gene Takagi says:

    Tammy, you may have a cause of action against the former CEO. You should confer with an attorney in your jurisdiction. The facts in your case will determine the potential remedies. Is there an affiliate involved in your case (I’m not sure why you posted your question here)?

  26. Gene Takagi says:

    Vincent,
    You’ll need to find a US charity that wants to fund your organization. This would not be an affiliate organization set-up discussed in this post.

  27. James says:

    Where in the IRS code or regs does it state that control is enough for an affiliation for non profits, I saw something over ownership but I know that wont work here.

  28. Gene Takagi says:

    James, “affiliation” is not really a defined term in the Code or regs. It denotes a level of relationship between organizations,most commonly in this context, when one organization has rights to elect a portion or all of the governing board of another organization or when two organizations have interlocking boards.

  29. James says:

    are there any cases that talk about the amount of control needed then to establish the affiliate relaitonship between 2 nonprofits, so that I can have something to refer to that shows what is necessary?

  30. Gene Takagi says:

    Affiliation is not a legal term for these purposes. So, there’s no minimum amount of control required to say that two organizations are affiliated. For example, someone might use the term affiliated based on a common mission rather than common governance. While the word “affiliation” may not be of particular legal significance, the actual level and methods of control are.

  31. Ben says:

    Hey, i’m curious about the money aspect of these c3 and c4 operations. I am involved with both a c3 and c4 however the president of both is the same person. Also, he always wants to put as much money as he can into the c3 even though the c4 funded and did the work for it. Neither organization does any lobbying or election work it is purely charity stuff. My question is, are there any financial or other advantages to having the money in the c3 vs the c4?

  32. Gene Takagi says:

    Ben, generally, the c3 can receive deductible contributions while the c4 cannot. So, the c3 may find it easier to raise money. But the c3 is limited in how it transfers money to the c4, if it does so at all.
    In your case, the c4 appears to be transferring money to the c3. This is often not a problem, so long as the separateness of the organizations is properly observed and maintained. This may mean that the transfer should be subject to a grant agreement where the c4 is independently ensuring that the grant funds were properly expended. Separation may be difficult to maintain where the same person serves as president of both organizations.
    If the c4 isn’t doing any lobbying or electioneering, the board may want to consider whether it is duplicating the services of the c3. Perhaps the c4 should be dissolved. Clearly, there are many more facts involved in such a decision, but it looks like the organizations may benefit from a review of their respective purposes and their relationship.