At a glance
| 501(c)(3) | 501(c)(6) | For-profit (C-corp / LLC / PBC) | |
|---|---|---|---|
| Federal income tax | Exempt on related income | Exempt on related income | Taxed (C-corp) / pass-through (LLC) |
| Donor deduction | Yes (§ 170) | No charitable deduction; dues may be a business expense (§ 162) | No |
| Foundation grants | Yes, routinely | Rarely; needs expenditure responsibility | Effectively no (PRIs aside) |
| Government grants | Broadly eligible | Sometimes | Contracts, not grants |
| Lobbying | Insubstantial; § 501(h) election advisable | Unlimited | Unlimited |
| Campaign politics | Prohibited outright | Permitted but not primary; § 527(f) proxy tax | Permitted |
| Owners / equity | None | None | Yes |
| Assets on dissolution | Locked to another exempt org | Locked | Distributed to owners |
| Financial disclosure | Form 990, public | Form 990, public | Private |
| Investor-compatible | No | No | Yes |
| Founder economic upside | Salary only | Salary only | Equity, dividends, exit; QSBS for C-corps |
| Board | Independent, fiduciary; state minimums | Member-driven | Controlled by shareholders |
| Time to stand up | Months (Form 1023) | Weeks–months (Form 1024) | Days |
| State sales/property tax relief | Often | Rarely | No |
| Typical revenue | Grants, donations, fees for service | Dues, sponsorship, events, certification | Sales, subscriptions, investment |
The trade-off in one line each
- c3 buys you money you can’t otherwise raise, at the price of control and political voice.
- c6 buys you political voice and purpose flexibility, at the price of the donor deduction and the grant pipeline.
- For-profit buys you speed, capital and ownership, at the price of tax and of the funders and customers who can only work with charities.
Failure modes to plan around
501(c)(3)
- Failing the public-support test in year six and being reclassified as a private foundation, which brings excise tax, distribution requirements and self-dealing rules. Diversify funders early.
- Drifting into advocacy that reads as campaign intervention. Draw the line in writing before an election year, not during one.
- Earned revenue growing into UBIT territory without anyone noticing.
- A board that was assembled for optics discovering it has real power.
501(c)(6)
- Serving one dominant member so closely that it looks like a service company.
- Assuming grants will come. Model the budget on dues from day one; if dues alone won’t cover it, a c6 is probably the wrong shell.
- Forgetting the § 6033(e) lobbying-proportion notice to members.
For-profit
- Mission drift after a financing round; PBC status constrains directors but does not stop a sale.
- Discovering mid-pursuit that the funder you built the plan around can only fund charities.
- LLC formation followed by an investor who requires a Delaware C-corp — the conversion is doable but costs time and tax analysis.
When two entities beat one
The common pattern for organisations doing research and policy and product is a 501(c)(3) plus a second entity — a c6 or c4 for unlimited advocacy, or a wholly-owned LLC to hold commercial activity and shelter the charity from UBIT. This is legitimate and well-trodden, but requires separate books, arm’s-length cost-sharing agreements, distinct branding, and discipline about which staff time lands where. See hybrids.md.