What is a 501(c)?

Published by Thomas Herold in Economics, Laws & Regulations

'501(c)' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

501(c) designations refer to incorporations of entities which are established as charitable not for profit corporations. These charitable operations are companies which are founded in order to offer the benefits of a community service instead of attempting to make profits for their founders or managers.

When such an outfit is incorporated it becomes legal. This gives it responsibility for the actions it carries out within its community. This legal status is critical for the founder. It takes away much of the legal responsibility of the individual who starts up the company. Any people who set up these 501(c) companies do so with the goal of having all legal liability for any damages removed from them. Instead, the responsibilities transfer over to the 501(c) itself so that the founder’s own personal assets are protected from any lawsuits or creditors.

Every state has its own particular set of rules for creating a 501(c) company. This is why participants are encouraged to seek out qualified financial and legal advice before they incorporate under this status. The expenses involved in establishing such a corporation are different depending on how large the corporation proves to be. The larger the outfit, the more expensive it is to establish.

The 501(c) status refers to the Internal Revenue Service code section that pertains to the charitable company rules. The document itself is a very dense and difficult read. This helps to explain how the not for profits earned such a non creative and cumbersome name associated with this type of company.

These 501(c)s do not have to pay any income tax to the federal, state, or local governments. The trade off for such a benefit is that they are not allowed to participate in election campaigns with a goal of helping a single candidate to be chosen versus another one. The companies are also forbidden to provide any material or financial benefits to the owners or officers of the organization itself. Such rules apply to the not for profit for its entire life span. This means that companies can not switch their status back to and from 501(c). Any not for profit organization that is no longer such an outfit must be disbanded.

This type of corporate designation proves to be a critical method for individuals who wish to establish organizations to help their overall community. It protects them from personal risks to their assets in the process. It also permits charity outfits to expand to a big enough company that they can affect major changes. These operations can grow far larger than the person who started them and can also outlive him or her.

The Internal Revenue Service has a variety of rules that individuals must observe in order to properly organize and operate under the 501(c) designation. Not a penny of the earnings may go into the hands of an individual or shareholder. The outfit must also not endeavor to sway any federal, state, or local legislation as a mainstay of its daily activities. They similarly may not be involved in political campaigns either for or against any candidates in the election. These organizations must be entirely charitable organizations in order to qualify for this tax exempt status.

Such operations also may not be created or run to benefit any persons’ private interests. For any not for profit that participates in excess benefit transactions with groups or people who have significant influence in the operation, they may suffer from the government levying an excise tax against the manager or individual who agreed to such a transaction in the first place.

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The term '501(c)' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.