In our efforts to assist the mobile food industry, Mobile Cuisine Magazine has consistently provided business information for food truck and food cart owners. With the rapid expansion of the industry many cities in the country have more than a dozen food trucks patrolling their streets now. Because of this trending growth, there have been numerous requests submitted to us to provide information on organizing food truck groups to give these areas a single focused voice to discuss their local issues.
Have you been thinking about starting a new, nonprofit, tax-exempt organization specifically centered on the mobile food vendors in your city or region? Have you tried to decide whether you should organize as a 501 c3 or c6? Do you even know the difference between them?
The c3 and c6 are similar in terms of exemption from income taxes, their qualifying characteristics, the application process (IRS Form 1023 vs. 1024), and the various rules governing their ongoing activities can be quite different.
It is helpful to first understand the distinction between a “nonprofit” and a “tax-exempt” entity. “Nonprofit” refers to an entity’s incorporation/organizational status as governed by state law, whereas “tax-exempt” refers to federal income tax exemption governed by the Internal Revenue Code. The c3 and c6 are two of the most common IRS tax-exempt statuses for nonprofits.
To qualify for either exempt status, a nonprofit must meet specific tests which are outlined in IRS Publication 557, Chapters 3 and 4, available at www.IRS.gov. One common requirement of a tax-exempt entity is that your net earnings may not benefit private shareholders or individuals. Once organized, c3 and c6 organizations are both required to file annual IRS Form 990, 990-EZ, or 990-N depending on their size. They may also be required to file 990-T and pay taxes if they have “unrelated business income.” While the applicable IRS schedules and required disclosures of the c3 and c6 vary, all tax exempt entities are expected to have strong governance policies and practices in place and the new 990 wants to know a great deal about them.
Which exempt classification is right for you? Here are some common differences:
- Operated exclusively for charitable, educational, religious, literary, or scientific purposes
- Includes membership associations (e.g., professional society), if the purpose is to advance the profession with respect to “educational” activities
- Lobbying and political activities are significantly restricted. A c3 will lose tax-exempt status if the IRS determines that it has engaged in “substantial” lobbying activities
Special Advantages of the c3 include:
- Enhanced fundraising advantages, such as eligibility to receive tax-deductible “charitable contributions” and gifts of property and eligibility to receive many grants
- Eligibility to receive other state and local tax exemptions (e.g., sales tax)
Example of nonprofit 501(c)(3): Urban Justice Center – Street Vendor Project
- Operated to promote a common business interest, and to improve business conditions in the industry
- A membership organization (e.g., business league, industry trade association), advancing a common business interest
- Allowed a wide-range of lobbying. Yet, the main stipulation is that a c6 is required to disclose to membership the % of their annual dues that is lobbying (i.e., non-deductible to members for tax purposes)
- Dues or other payments to a c6 are only deductible to the extent that they serve an “ordinary and necessary” business purpose of the payer
Examples of nonprofit 501(c)(6): DCMFVA: DC Mobile Food Vendors Association, SoCal Mobile Food Vendors’ Association
As you can see, there are several similarities and distinct differences within the world of the 501(c); and c3/c6 represents only two of several types. When creating a new nonprofit organization for the mobile food vendors in your city or region, it is always recommended to consult with legal, tax, and association management professionals with the background and experience to help you make an informed decision and to protect your ongoing tax-exempt status.
If you have any additional tips for those interested in forming a new nonprofit, please drop us a message or leave it here in the comments section.