Should We Be a 501(c)(3)?

Many people consider nonprofit and 501(c)(3) to be synonymous. Well, that’s not always true…

Nonprofit refers to an organization being a private, not-for-profit corporation. That means the organization has registered as a non-profit business in the state in which it operates. In most states, registration is pretty simple. But, to register, the organization will need to have articles of incorporation, and perhaps by-laws, and an initial group of trustees or officers to register. Regulations vary to some degree, state by state.

Once registered as a nonprofit corporation, an organization may become a “501(c)(3).” This is a federal, IRS, tax status. It means that donations to the charitable business are tax-deductible for donors. The paperwork and process to become a 501(c)(3) is cumbersome, time-consuming, and often involves the help of an attorney or nonprofit expert. The organization must show that its purpose and mission is of educational, social, or cultural value to receive the tax-exempt status.

Public libraries that are government agencies can receive donations, and they are tax-deductible for donors, so the question is, should your Friends or foundation become a 501(c)(3)? There are two main reasons to have the 501(c)(3) charitable tax status. First many donors, especially major givers, prefer to give to private organizations rather than government agencies, and tax deductibility is very important to them. Second, some granting agencies will only give to 501(c)(3) organizations, and not government agencies.

Nonprofits interested in effective fundraising find it essential to become a 501(c)(3), but it isn’t necessary or wise in all cases. If your Friends or foundation is not pursuing significant donations or grants (for instance just having a $5 membership), and their major focus is on book sales or volunteering, neither of which involve tax deductibility, there may be no need to pursue 501(c)(3) charitable status. A major gift, needing tax-exempt status, can always be routed through the library itself, if it is a government agency.

Please note that if your state has a sales tax, and your group would like to be able to purchase items without paying sales tax, the process for becoming exempt from sales tax is a separate process, handled by your state. In many states, only 501(c)(3) nonprofits are eligible to be sales tax exempt.

If you are interested in pursuing nonprofit or 501(c)(3) status, it is recommended that your group consult with a nonprofit attorney or other expert to determine the best route for you group. Many states also have nonprofit, or statewide library Friends/foundation associations, that will provide advice and guidance on the various processes of becoming incorporated and the legalities of tax-exempt status in your locale.