There are three key components for an organization to be exempt from federal income tax under section 501(c) (3) of the Internal Revenue Code. A not-for-profit (i.e., nonprofit) organization must be organized and operated exclusively for one or more exempt purposes.
ORGANIZED – A 501(c) (3) organization must be organized as a corporation, trust, or unincorporated association. An organization’s organizing documents (articles of incorporation, trust documents, articles of association) must: limit its purposes to those described in section 501(c)(3) of the IRC; not expressly permit activities that do not further its exempt purpose(s), i.e., unrelated activities; and permanently dedicate its assets to exempt purposes.
OPERATED – Because a substantial portion of an organization’s activities must further its exempt purpose(s), certain other activities are prohibited or restricted. A 501(c) (3) organization:
- Must absolutely refrain from participating in the political campaigns of candidates for local, state, or federal office.
- Must restrict its lobbying activities to an insubstantial part of its total activities n must ensure that its earnings do not inure to the benefit of any private shareholder or individual.
- Must not operate for the benefit of private interests such as those of its founder, the founder’s family, its shareholders or persons controlled by such interests.
- Must not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose, such as a school’s operation of a factory.
- May not have purposes or activities that are illegal or violate fundamental public policy.
EXEMPT PURPOSE – To be tax exempt, an organization must have one or more exempt purposes, stated in its organizing document: charitable, educational, religious, scientific, literary, fostering national or international sports competition, preventing cruelty to children or animals, and testing for public safety.