Do I Need a 501(c)(3)?
Organizations that qualify as public charities under Internal Revenue 501(c)(3) nonprofit code have many advantages that they wouldn’t otherwise, including eligibility for federal exemption from payment of corporate income tax, limited liability, and the capacity to offer donors tax deductions for their donations.
Since the right to exist as a 501(c)(3) is determined solely by the IRS, let's start with an exact definition: "To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization (i.e., it may not attempt to influence legislation as a substantial part of its activities, and it may not participate in any campaign activity for or against political candidates)."
So, the first question, which is quite simple and easy to answer, “Does this define your organization?” If so, your next step is to decide if a 501(c)(3) nonprofit is the right course of action for you. Let’s look at the pros and cons. Also, to start, you may want to watch this rather lengthy but very thorough explanation of whether a nonprofit is for you.
Reasons why you MAY want to start a 501(c)(3) nonprofit
When you form a 501(c)(3) nonprofit your organization can ...
Take advantage of federal tax exemptions, which means you don't have to pay corporate income taxes and you probably won't have to pay many state and local taxes.
Receive tax deductible contributions from donors, whether they are businesses or individuals and regardless of their size – which makes it much easier to solicit funds.
Become eligible for public and private grant awards. A good source of information for grants is CANDID Foundation Directory.
Enjoy limited liability where the founders, directors, and employees cannot have their personal assets seized to pay for corporate debts by creditors or the courts. (The exception to this is when the nonprofit’s activities are illegal, or the directors have been irresponsible in their management.)
Reasons why you MAY NOT want to start a 501(c)(3) nonprofit
The challenges of setting up a 501(c)(3) nonprofit include ...
Maintaining detailed records and submitting annual filings to your state and the IRS.
The expenses and time that are required to apply for incorporation and tax exemption. Most nonprofits hire an attorney and an accountant to assist with the various tasks involved, which can also be quite expensive.
A willingness to share control over the organization, despite the founder's personal vision. A nonprofit is subject to numerous laws and regulations, a board of directors, and its own articles of incorporation and bylaws.