Lima Street Continuum

Life Cycle of a Social Welfare Organization

Life Cycle of a Social Welfare Organization - Starting Out

Civic leagues and social welfare organizations are exempt under section 501(c)(4) of the Internal Revenue Code. Social welfare organizations generally fall into one of the following categories:

Organizations that may be performing some type of public or community benefit but whose principal feature is lack of private benefit or profit;

Organizations that would qualify for exemption under section 501(c)(3) but for a defect in their organizing documents or if they were not "action organizations"; and

Nonprofit organizations that traditionally have been labeled in common parlance as social welfare organizations.

During its existence, a social welfare organization has numerous interactions with the IRS – from filing an application for recognition of tax-exempt status, to filing the required annual information returns, to making changes in its mission and purpose. The IRS provides information, explanations, guides, forms and publications on all of these subjects – they are available through this IRS Web site. The illustration below provides an easy-to-use way of linking to the documents most organizations will need as they proceed though the phases of their "life cycle."

In addition to the following illustration, you can also download a "graphical depiction" of the life cycle, which includes functioning links back to our site.

Part I

The first stage in the life cycle of any organization is its creation. A nonprofit organization may be created as a corporation, a trust, or an unincorporated association. Any of these entities may qualify for exemption. Note, however, that a partnership generally may not qualify.

 To qualify for exemption as a social welfare organization under section 501(c)(4), an organization must be organized exclusively for "purposes described in that section". This means, among other things, that the organization must have "organizing documents." Most organizations also adopt "by-laws". It should also apply for an "employer identification number," even if it does not have employees.

Creating an Exempt Organization

 The first stage in the life cycle of any organization is its creation. A nonprofit organization may be created as a corporation, a trust, or an unincorporated association. Any of these entities may qualify for exemption. Note, however, that a partnership generally may not qualify.

Additional information:

Organizing documents By-laws and Reinstatement of corporate charter does not create new organization

Social Welfare Purposes

To be operated exclusively to promote social welfare, an organization must operate primarily to further the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements). An organization whose purposes are "charitable" within the meaning of Code section 501(c)(3) may also be a social welfare organization under section 501(c)(4).

 An organization that restricts the use of its facilities to employees of selected corporations and their guests is primarily benefiting a private group rather than the community and, therefore, does not qualify as a section 501(c)(4) organization. Similarly, an organization formed to represent member-tenants of an apartment complex does not qualify, since its activities benefit the member-tenants and not all tenants in the community, while an organization formed to promote the legal rights of all tenants in a particular community may qualify under section 501(c)(4) as a social welfare organization. An organization is not operated primarily for the promotion of social welfare if its primary activity is operating a social club for the benefit, pleasure, or recreation of its members, or is carrying on a business with the general public in a manner similar to organizations operated for profit.

 The language of both the statute and the regulations describes a broad category of organizations. As stated in the 1981 EO CPE text article "Social Welfare: What Does It Mean? How Much Private Benefit Is Permissible?"

 Although the Service has been making an effort to refine and clarify this area, [section] 501(c)(4) remains in some degree a catch-all for presumptively beneficial non-profit organizations that resist classification under the other exempting provisions of the Code. Unfortunately, this condition exists because "social welfare" is inherently an abstruse concept that continues to defy precise definition.

Exempt Organization - Exemption Application

To be recognized as exempt under section 501(a), most organizations must file an application for recognition of exemption with the IRS. Most organizations applying for exemption under section 501(a) (other than section 501(c)(3)) use Form 1024. Form 1024 has instructions and checklists to help you provide the information required to process your application. The IRS will not process an incomplete application.

Annual Exempt Organization Information Returns

In general, exempt organizations are required to file "annual returns," although "exceptions apply." If an organization does not file a required return or files "late, penalties" may be assessed.

Form 990: In general, organizations exempt under Internal Revenue Code section 501, 527, and 4947, other than private foundations, must file their annual information returns on Form 990, or Form 990-EZ.

Form 990-N: Organizations with gross receipts of less than $25,000 are not required to file Form 990 or 990-EZ and Schedule B (Form 990 or 990-EZ). These small organizations may be required to file an annual electronic notice - e-Postcard (Form 990-N) for tax periods beginning after December 31, 2006.