Starting and Using a 501c6 for Nonprofit Needs

So, not all non-profits are charities. All that nonprofit status means is that an organization isn't operating to generate and distribute profits, which leaves plenty of room for interpretation. That's where the several identifying organizational codes come into play.

For example, the 501(c)(6) nonprofit organization is one that serves the community and the constituents it represents by the promotion of business practice. These types of nonprofits focus primarily on business leagues, being an association of people with similar business interests; however, they do not include the intention to make a profit for the organization or its members, as the name implies.

Want to start a 501(c)(6) nonprofit organization? We will guide you through all that you need to know about what is needed and required, the benefits, and how to set one up, one step at a time.

What is a 501c6 Organization?

A 501c6 Organization is a membership type of organization whose members have common business interests. The purpose of the organizations must be to promote their common interest and improve business conditions, not to engage in a regular business for profit.

501c6 entities include the following:

• Business leagues                                                                                                                                           
• Professional football leagues
• Boards of real estate
• Boards of trade                                                                                                                                                  
• Chambers of commerce

Thousands of local chambers of commerce formed nationwide to assist their members—all of which qualify as 501c6 organizations. Other good 501(c)(6) organizations include the National Board for Health and Wellness Coaching and Drone Service Providers Alliance. We'll be discussing the above examples in more detail below.

Examples of 501(c)(6) in Detail

A 501(c)(6) must be organized as a nonprofit entity. But, the 501(c)(6), like other non-charitable types of nonprofits, must be non-commercial in nature.

That may sound funny, especially given that a 501(c)(6) represents business interests. It goes back to the notion above that the activity shouldn't be the direct offering of services to the public. As is often the case in understanding a nonprofit category that is unfamiliar, examples can be quite instructive.

Chamber of Commerce

The business league is well exemplified in the form of the Chamber of Commerce, be it local, regional, or national. Normally, an organization that continuously tends to become a member of a business league consists of entities—almost exclusively companies, not individuals—that do business in a common geographic area. An organization that is into activities regarding business, in contrast to involvement in actual business such as sales or selling of goods, is a Chamber of Commerce. It's particularly easy to see it with more local, city-oriented Chambers of Commerce.

Trade Associations

A trade association may have either individual or business members, or a combination of both. For example, a trade association oriented toward individuals may be a member organization that supports a particular group of professionals, such as attorneys, cosmetologists, or certified mechanics. This is not to be confused with labor unions that represent individual workers in their interaction with specific employers.

Trade associations for individuals working better the business prospects overall for their members regardless of who employs them. In addition, there may be programs and activities that pertain to trade publications, conventions, opportunities to be engaged in continuing education, and even job boards.

501(c)(6) trade associations have more business members and are usually made up of companies in the same line of business. The IRS would not allow owners of the same exclusive brand to form a 501(c)(6). In fact, in the late 70s, a group of Midas muffler shop franchisees tried to do just that. The IRS spurned the bid, and on appeal, the tax court agreed with the IRS- a 501(c)(6) trade association represents the industry, not the brand.

Professional Sports Organizations

I included this category because it surprises people, but believe it or not, the National Football League (NFL) was a 501(c)(6) business league up until the time they voluntarily gave up their tax-exempt status in 2015. It was not because they didn't qualify to be 501(c)(6), but rather because of negative public opinion.

For that matter, I would rather that they had stuck to their guns on the opportunity to explain that the NFL was a textbook example of a 501(c)(6) business league rather than caving. The team owners (members) certainly aren't nonprofit or tax-exempt. But the NFL was not the first or the only one to do this.

The NBA walked away from its 501(c)(6) status in 2007, and Major League Baseball never claimed it. Some professional sports leagues still hold onto 501(c)(6) status, like the National Hockey League (NHL), Professional Golfers Association (PGA), and Ladies Professional Golfers Association (LPGA).

How to Start a 501c6 Organization 

Step One: Have a Clear Mission and Vision Statement

Your mission and vision are the reason for your organization's existence. It explains to people why you exist, who you help, and why others should give to your organization. Without a very detailed and well-thought-out mission statement, your organization will fail to connect with people.

For those who are struggling to define their mission or are having difficulty crafting a vision statement, read more about it on our Paybee blog. This makes life a lot easier once you have defined the purpose of your organization; naming your organization, choosing board members, and coming up with programs and membership benefits for the organization. Since the requirements for naming an organization and naming board members will vary from one state to the other, do your research on the local and state laws.

Step Two: Build a Member Base

The IRS classifies a 501c6 organization as a membership organization. The members of these organizations are to hold a common business interest and be required to pay membership dues which will fund a combined goal.

Membership dues should make up a large portion of your budget as a 501c6, and the advantages to this are clear. Members can pay their membership dues monthly, quarterly, annually, or biannually. This is money that you can count on, and you can include it in your budget and financial planning at the beginning of your fiscal year.

The trouble with many membership organizations is to continue offering enough benefits to encourage membership and fund the organization. Often members will start out strong and simply disappear along with their dues.

Step Three: Form a Board

Form a nonprofit board of at least three members, as required of these organizations by the IRS. This means you'll have to know whom you'll need for your board and their responsibilities. You'll also likely want board members familiar with your target industry and its constituents so they can understand the challenges you face as an organization.

A board can either be the making or breaking of a non-profit organization. With the formation of the board of directors, you will have a feeling of trying to involve a willing person to assist at the start of the organization. On the contrary, it is the most crucial time for the board of directors; since the members will write the bylaws and other regulations, it will form a foundation for your non-profit.

As your nonprofit grows, so will the role of a board member. Board members will have to help spread the word about your organization throughout the community, serve on committees that develop programs and events, and review the organization's budgets and financial statements, to name just a few of the duties expected.

Some of the board members will have to take on the officer roles of President, Vice President, Treasurer, and Secretary, roles that are even more demanding in time and effort on the part of the people who fill them.

Getting key community leaders to fulfill these and many other roles can be a hard task when you have no idea where to begin. To learn more about the responsibilities of board members, make sure you read our blog post here.

Step Four: File and Mail IRS Form SS-4

During the incorporation of a nonprofit, the IRS requires an organization to get an Employer Identification Number (EIN) as a requirement. The way to apply for this number is relatively simple, easily done by filing an IRS Form SS-4.

An EIN is a nine-digit number that, for any kind of organization in the United States, can be used for the purpose of tax filing. You can file it online and get an instant response. If you decide to file IRS Form SS-4 by fax or mail, then normally it will take from 4 to 6 weeks.

Step Five: Obtain a Copy of the Articles of Incorporation

Most states require articles of incorporation to include at least the following:

Your organization's official name: You will need to verify how to name your organization with your state. Each state has different rules, so be sure to visit your state's Department of State to choose a name.

Physical address.

Registered agent name and address: A Registered Agent will receive all the legal notices meant for the business. This can either be a person or a company, although they are required to have a physical office in the state that functions every business day of the week.

Board of Directors: List of board members including their positions and physical addresses States may also require an Incorporator to sign the Articles of Incorporation for your nonprofit. It does not need to be a board member.

Purpose of the entity: Make sure you state the purpose of your entity on this application and any other official documents. The wording of your entity's exact purpose is to be included in all legal documentation that goes to the state and federal government.

501c6 Membership Organization: Most states will inquire about whether or not an organization is a membership organization, usually on the Articles of Incorporation. As a 501c6 you must have members so be sure to make this clear on your application.

Organization commences: Organization commences upon approval of the application for articles of incorporation. In some states, you may indicate an effective date that is other than the date of filing.

Remember, each state will have a separate process for filing your articles of incorporation. In the case of Pennsylvania, you will be required to publish your intent to incorporate and your incorporation with two separate state newspapers. Find the state requirements for starting a nonprofit in your state and do your due diligence in this process with your local government.

Step Six: Fill out IRS Form 102 to Apply for 501 Tax-Exempt Status

After the EIN and articles of incorporation, you need to apply for tax-exempt status with the IRS. To obtain recognition as a 501c6, you file Form 1024 either online or by mail.

Your application will have to include your EIN, articles of incorporation, the purpose of your organization, and other detailed information including a list of your organization's specific activities.

Just make sure the wording of your organization's purpose remains exactly the same as what you included in your articles of incorporation and other legal documents because the IRS will check that wording and might deny your application if it's different.

Full financial statements as applicable should be included on Form 1024. These are detailed in terms of revenues and expenses for the organization, and then, of course, any proposed budgets for the coming year.

This must be signed by an officer, trustee, or attorney on behalf of the corporation. This may well be the same Incorporator who signed your articles of incorporation. Although Form 1024 can be long and somewhat unclear at points, the potential money saver with tax exemption makes it worth the hassle.

Step Seven: Get Your Determination Letter From the IRS

The letter proving tax-exempt status with the IRS is your Letter of Determination. In the case of 501c6 organizations, you will need to attach Form 8718 with Form 1024 when filing for federal tax exemption.

This will include a fee of generally $600. Once you have filed the form and they've accepted your application, the letter of determination will be mailed, and you can contact your state for all local tax-exempt options.

Step Eight: Contact Your Local, County, and State Revenue Departments

Every state is different when it comes to filing for tax-exempt status. Some do not offer any state tax-exempt states. Others will request you to fill out an application or use your letter of determination to buy an item for your organization.

Contact local, county, and state departments for all your state tax-exempt options. 

What is the Difference Between 501(c)(3) and 501(c)(6)?

While 501(c)(3) organizations are the most well-known of nonprofits, they differ from 501(c)(6) non-profits in the following ways:

Exemption from federal income tax: 501(c)(3) and 501(c)(6) organizations are free from federal income tax, but 501(c)(6) non-profits are also sometimes subjected to state and local taxes.

Charitable status: 501(c)(3)s are charitable organizations and 501(c)(6) organizations are common business interests. 

Donor information: 501(c)(3) organizations must disclose donors’ identities to the public, but 501(c)(6) nonprofits have the option to protect donors’ confidential personal information.

Electioneering: 501(c)(3) organizations are not allowed to be involved in political campaigns, but 501(c)(6) are able to.

Political lobbying: A 501(c)(3) organization can, in fact, do political lobbying but with more restrictions and limitations compared to 501(c)(6) non-profit organizations, which are not restricted by law concerning engaging in unlimited political lobbying activity.

Frequently Asked Questions About Starting and Using a 501c6 for Nonprofit Needs

What is the key difference between having a 501(c)(6) and a 501(c)(3)?

The primary difference between the two is in their purposes: 501(c)(3) organizations are charitable, and 501(c)(6) organizations are business leagues for the purpose of promoting common interests. Other differences would be that 501(c)(3)s disclose their donor information and cannot do political campaigns, much less lobbying in a more restricted fashion than the 501(c)(6).

How do I know which designation would be most appropriate for my business: 501(c)(6) or maybe one of the others?

Consider the mission of your organization and its activities. If the organization is primarily engaged in promoting business interests and encouraging particular industries, 501(c)(6) may apply. Consult with an attorney for legal advice.

Which are the relevant specific papers needed for application for the 501(c)(6) status?

The application package for 501(c)(6) status will always include the articles of incorporation, bylaws, a clear statement of purpose for the entity, financial statements, and IRS Form 1024.

Can a 501(c)(6) organization participate in political or lobbying activities?

While 501(c)(6) organizations are permitted to engage in lobbying up to a point that 501(c)(3) organizations are not, there are limitations and regulations they must follow.

What are the tax reporting requirements for a 501(c)(6) organization?

The 501(c)(6) organizations are further required to file an annual information return (Form 990) with the IRS. The return provides details regarding financial information and activities. In addition, based on the level of revenues, many states have further reporting requirements.

Final Words: Starting and Using a 501c6 for Nonprofit Needs

All nonprofits need robust fundraising to be able to support their organizational objectives. That's where Paybee comes in: Fuel impactful fundraising with the one-stop, end-to-end online donation platform for nonprofits.

With your fundraising tools in place, you'll want to know how to engage those supporters. Need a spark for ideas? Read Nonprofit Fundraising Ideas to source charity events and campaign ideas to juice up your upcoming calendar for your 501(c)(6) organization.

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