What Does it Mean to Be a 501(c)(3) Organization?
In the US, the designation of 501(c)(3) is used to identify not-for-profit organizations that have been granted tax exempt status by the Internal Revenue Service (IRS). While the IRS designates 29 types of nonprofit organizations that are exempt in some way from federal taxes, 501(c)(3) specifically denotes an organization that is either charitable, religious, scientific, educational or one of several other humanitarian purposes. Two of the key benefits of registering as a 501(c)(3): tax exemption and the ability to accept charitable contributions and donations that are tax deductible for the donor.
Many nonprofit organizations apply for tax exempt status as a signal to their stakeholders that they take their mission seriously, and that they can be trusted to provide benefit to the communities they serve. Part of this stewardship approach falls to the nonprofit’s board of directors – whether the charity is a recent startup or an established 501(c)(3), it’s pivotal that the organization has a strong modern governance structure in place.
Challenges for 501(c)(3) Organizations
Not-for-profit organizations, particularly those just getting started, often face challenges to cultivate significant ongoing financial support. While it’s true that receiving the 501(c)(3) designation allows a charity to fundraise, that designation alone does not make donations magically appear. Fundraising, and ensuring adequate financial support, is a major role for many nonprofit boards of trustees. One particularly successful way board members can help with fundraising challenges is to leverage their networks and make introductions to potential donors for the 501(c)(3) organization. Additionally, many 501(c)(3) nonprofits find establishing and reinforcing best practices in governance to be a challenge.
Nonprofit Governance for 501(c)(3) Organizations
As in the corporate sector, good governance is required to ensure the long-term health and sustainability of 501(c)(3) nonprofit organizations. While there are some variations in the size, specific committee structure, and frequency of meetings of not-for-profit boards, all boards of trustees are charged with the same fiduciary duties as their for-profit counterparts, namely:
- The Duty of Care: making the best decisions in the interest of the organization in light of all available data
- The Duty of Loyalty: ensuring that directors put the interests of the nonprofit organization above their own self-interests (avoiding conflicts of interest)
- The Duty of Obedience: reinforcing that all trustees must abide by applicable laws and regulations, and ensuring the organization operates lawfully and ethically.
Beyond their basic fiduciary obligation, nonprofit boards are also responsible to hire, compensate, evaluate, and support the chief executive – who, most commonly, is the board’s only direct-report employee. Trustees are also expected to play a role in overseeing the nonprofit’s strategy, ensuring that the organization is working in good faith to fulfill its mission, and using donors’ funds and other sources of charitable support appropriately.
Additionally, nonprofit boards play an important role in setting the tone for organizational culture, protecting the reputation of the organization, fostering strong relationships with appropriate partners and supporters, and being responsive to the needs of the organization’s stakeholders. On the whole, it’s a challenging job – but one that can be very rewarding for trustees who are passionate about the nonprofit organization’s cause, and who are able to find ways to leverage their talents and networks in support of the mission.