Starting a 501c7 Social Club from the Ground Up
Starting a 501c7 Social Club from the Ground Up
Did you know charitable organizations aren’t the only ones who can enjoy tax free status? Believe it or not, social and recreational clubs can participate in the same savings on taxes even though they are not considered a charity under the IRS 501(c)(7) provision of the tax law. In fact, social clubs have been enjoying this benefit since the Revenue Act of 1916 was enacted.
And while there are some key differences between a 501(c)(7) organization and other traditional charitable organizational structures like a (501(c)(3), creating a social club and gaining tax-free status can really assist your social club in staying financially secure so it can continue to offer pleasurable, recreational, and other non-profitable activities.
The reason these types of social clubs are so important to the non-profit sector is because they add diversity ensuring that a variety of interests and passions are served, contributing to a well-rounded and engaged community and enhancing the lives of its members. While their focus is distinct from charitable nonprofits, they serve a valuable role in promoting social connections, leisure, and well-being to their members and communities as a whole.
What is a 501(c)(7) Organization or Social Club?
A 501(c)(7) organization is a specific type of tax-exempt nonprofit organization in the United States and is classified as a "Social and Recreational Club" under section 501(c)(7) of the Internal Revenue Code. These types of organizations are created for the purpose of providing opportunities for their members to engage in pleasurable, recreational, and non-profitable activities. The most common forms of 501c7's are social clubs, country clubs and sports and hobby clubs. You can think of a 501c7 as a private gym membership, or a private golf course where only members get to use the facilities and resources.
A few other types of clubs that are often 501c7's are:
- Social Clubs: These can include a wide range of organizations like wine clubs, book clubs, and hobby-focused clubs.
- Yacht Clubs: Organizations focused on boating and sailing activities, often with a marina and social events.
- Hunting and Fishing Clubs: Groups that promote and organize hunting and fishing activities, often with conservation efforts.
- Alumni Clubs: Some alumni associations qualify for 501(c)(7) status when their primary focus is on social and recreational activities.
- Garden Clubs: Clubs for gardening enthusiasts who come together to learn and share information on their love for plants and horticulture.
And of course just about any other type of club or socially knit group you can think of.
These types of organizations exist for the betterment of the individuals who belong, and not to society as a whole like a regular 501(c)(3) organizations or charities.
501(c)(7) vs 501(c)(3)
When talking about the normal animal charity you donate regularly to versus a 501(c)(7) organization, there is often confusion as both of these business structures enjoy tax-exempt status under the different IRS tax codes. But as you'll see, both of these entities are quite different and serve very unique purposes.
The 501c7 organization is a closed network of individuals who all share the same enthusiasm for a hobby or other social event. You can picture a private golf course as a typical 501c7 organization. Golf courses are big, expensive and take a lot of time and resources to maintain. And because they are private, they can not raise revenue from the local population, but rather look to its membership to foot the bills unlike a charity that can solicit for donations through fundraising events.
Yet they do serve a service to the community as far as providing its membership with resources to enjoy pleasurable, recreational, and non-profitable activities. And like any other sort of charity, no members are allowed to personally benefit from the organization in a way that is not accessible to all its members, meaning if you started the organization, you can't now call it home and live there rent free just because you were the one to start the entity.
And exactly the opposite of a charity, if a 501c7 does start to make money off of the general public in any way, it risks losing its tax-exempt status. This is not totally exclusive as we'll see in the next section, but there are very strict requirements on how a social club can raise money outside its own membership and not jeopardize its tax exemption.
The 501(c)(3) organization is your typical charity that raises money in order to help society as a whole like an animal rescue charity, or a church outreach ministry. Unlike a 501c7, charities look to the public for funding usually through the forms of donations and grants and not to their members. Charities also have the ability to raise money for their cause through fundraising events and other means, whereas social clubs are not allowed to solicit funds from the public under any circumstances.
Charities are also able to process receipts to donors and pass on their exemption status and makes them tax deductible to the donor, thus passing the charity's tax benefit on to the public. 501c7's on the other hand can offer tax benefits to its membership in the form of writing off membership fees as deductions on their taxes, but they can not extend this exemption to any individual who is not part of the social club.
And of course the biggest difference between a 501c7 vs 501(c)(3) organization is the fact that a charity must in some way benefit the entire community or world in some specific way. And as we stated before, this is the opposite of a 501c7 organization as they are set up to benefit only its own members and not the collective society.
So while both of these types of corporate entities do have similar tax advantages, there are major differences in their operations, the way they're funded, and how their creation effects individuals and society.
Benefits of 501(c)(7) Status
The benefits of attaining 501 status for nonprofits are many, and it can definitely be worth the investment to start your own 501. Perhaps the most significant benefit is that a 501(c)(7) organization's business activities are tax-exempt from federal income tax. This means the social club's income, including membership dues and other revenue sources as long as they come from its own membership and less than 35% from outside sources is generally not subject to federal taxation.
Unlike 501(c)(3) nonprofits that can extend tax free deductions on any donation given to them by the general public at large, 501 (c) (7) organizations can take advantage of donations from their own membership, often times passing their tax-exempt incentives onto them if they are counted as gifts, or when they join, membership fees for club activities. The only stipulation is the funds received must be used for funding the organization.
And although these types of entities can’t solicit the general public, nor open their doors to their facilities, they can receive up to 15% of their total revenue from third party contributors like charging guests of the membership, or for renting out their facilities for certain functions without risking loosing their tax-exempt status.
Another important reason many social clubs like to incorporate this way is to gain the same protection of assets other types of corporations enjoy. The membership of the 501 (c) (7) organization is under no legal obligation when it comes to any liability or debts the organization accrues, and their personal assets are shielded from any personal liability.
The last reason why you might want to structure your own organization as a club is once you've reached 501 c 7 status, your entity now enjoys the recognition of a legitimate organization that comes with it. This makes it much easier to reach out to potential members as well as gain credibility which can translate into better lease agreements, insurance and other legal matters. It is even possible to receive a grant or donations from individuals, corporations, and foundations as long as the total amounts acquired are below the IRS minimum.
- The club's primary purpose must be geared toward exempt objectives.
- The social club should facilitate personal interaction among its members and maintain restricted membership.
- The club's financial support should come from membership fees, dues, and assessments.
- Any surplus earnings from nonprofits should not benefit individuals with a personal and exclusive interest in its undertakings.
- If the social club surpasses the safe harbor guidelines for income from nonmembers and investments, the circumstances must demonstrate its substantial alignment with exempt objectives. For more details, refer to the section "Impact of Nonmember Income on Exempt Status" below.
- The social club can receive negligible income from unconventional sources.
- The club's governing documents must not include any provisions that permit discrimination based on race, color, or religion against any individual.
How to Start a 501(c)(7) Nonprofit in 6 Steps
All types of 501 nonprofits will need to meet certain requirements in order to obtain tax free status in the eyes of the IRS. A list of these can be found on the IRS Social Club web page and are easy enough to understand whether or not creating a 501 c is the best option for your club. If you feel this is the way to go, then follow the steps below and get your own 501 up and going.
Limited membership here does not mean limited in the amount of people that can become part of your entity. Rather the "limited" specification means more of a "limited access" than anything else. Limited in this context is referring to the individuals allowed to use or take part in the organization's social activities are strictly the membership itself, a guest or relative of a member, and under certain circumstances a member of the public community. So be sure you meet this requirement or your application will get kicked back.
Create a Board of Directors
Every 501 (c) must have a minimum of three individuals on its board of directors. These people do not need to have any special skills or education, but they should be people that can help your nonprofits in some specific way. For example, you may want to have a tennis pro on your board if you're a tennis club, or an attorney or certified public accountant that can do all of the club paperwork for a reduced fee or even pro bono is also always helpful.
Again, you must have a minimum of three officers, who may or may not be board members as well, in order to be in compliance with the IRS. Once you have a board organized, they'll need to vote on these officers during their first official meeting. You should start with a president, secretary, and treasurer at an absolute minimum.
Write Out Bylaws and Articles of Incorporation
Your bylaws will need to be voted on and passed/accepted by the board of directors per IRS rules, this is why they need to happen after your board is finalized. Your bylaws are the rules that will guide your club on an internal level. Some states do require a copy of your bylaws if you're a nonprofit, so make sure they are well written and everyone involved in the organization should be given a copy and understand they are literally 'the law'.
You'll also need to include a copy of your Articles of Incorporation which is what's needed for your parent organization to become a legal entity in the eyes of the state you're residing in. This document will also go to the IRS and in order to be accepted by them, it must have certain language within the document. You can find an exact explanation of the language that must be included directly from the IRS here.
Your EIN Number
Think of Employer Identification Numbers (EIN), also known as a Federal Tax Identification Numbers, as a social security number for your organization. You will need this number for all sorts of things, specifically on your application for your 501 (c) 7 organization as well as for any filings done with the IRS. This step is incredibly easy and only takes minutes. Simply go here to the official IRS page and apply. You will get this number instantly while you're online. Download the sheet and make sure you keep a copy. You'll also need to have this when you open a bank account for your organization, so it is a must have.
Filing IRS Form 1024 to Become Tax-Exempt
IRS Form 1024 is a 22 page document that you will need to download, fill out and submit to the IRS. This application may seem long, but as a 501 (c) (7) organization you're not going to need to fill out the entire application as some sections don't apply to a (7). And although it is possible to complete the application and the process by yourself, we highly suggest you use someone that has a lot of experience filling out these types of applications as they do require a lot of information and take a long time to be reviewed, and if it gets rejected due to some simple error you can be wasting a lot of time and money. So if your organization can afford to hire a professional, we highly suggest you at least have them do a final look over before submitting your application.
State Level Stuff
Since legal matters on a state level vary so much, it is practically impossible for us to explain what each and every state demands as far as starting a nonprofit. So for the sake of space, when it comes to state laws and regulations, you'll need to do a bit of research on what that will entail for you. All states do require you to have a board of directors and bylaws, and all states require you to incorporate your corporation and have your Articles of Incorporation. But for things like if you will also be tax-exempt in the state really does vary from state to state. We do however have a comprehensive guide on starting a nonprofit in Texas if you want to take a look.
The Technical Side of Things
If you are looking to form your own club, one of the best resources you can start using is PayBee's platform. Our software and tools are specifically designed for nonprofits big and small, while also offering advanced features like communications with all of your members, including employees and volunteers. We also assist your club in keeping track of all your important documents, tax filings, income and a host of other resources that can make everyone's lives so much easier! Just take a look at our free demo and you'll see how we make nonprofits profitable and easier to manage.
It's quite surprising that almost any type of club can qualify for income exempt status as a 501 as far as the IRS is concerned, and even do a bit of income fundraising internally in some cases.And although these aren't nonprofits in the common sense of the word, they still enjoy many of the same benefits, and do serve a purpose within the community.
Now, with all the information we've gone over above, it should be easy to form your own 501 club for your members so everyone can enjoy the benefits of club membership, while getting a tax exemption for all their fees at the same time. Just make sure when you start your club to use PayBee's platform to make your life so much easier than trying to keep track of everything on your own. Our platform really does build and grow some of the biggest nonprofits in the sector. So give our demo a try now!