You've heard of 501(c)(3) organizations - nonprofits organized for charitable, educational, religious, benevolent, etc. purposes. But what about a 501(c)(7)? We often have conversations with folks who have recently become an officer of their club and are worried about the financial set-up of the club. More often than not, the club has been operating informally, which means that any funds collected from the members are being deposited in the personal account of whoever is the treasurer. And it’s right for them to be worried!
Using a personal account, rather than a business account, for club business is bad for everyone. First, it makes it really hard to figure out the accounting of the club. If you’re the treasurer, an audit could mean that everyone gets to look at your personal spending habits, and worse — it could mean that the IRS will treat the money from the club as income to you personally and increase the amount you owe on tax day.
For most clubs, there’s a simple solution: become a 501(c)(7) Social Club. What is a 501(c)(7) Social Club? The IRS defines a 501(c)(7) Social Club as a social or recreational club that is organized for pleasure, recreation, and other nonprofitable purposes. Members must share interests and have a common goal directed toward pleasure and recreation, and the organization must provide opportunities for personal contact among members. The organization's facilities and services must be open to its members and their guests only. The organization must be a club of individuals, and no individual may derive profit from the organization's net earnings. Examples of social clubs include chess clubs, amateur cycling clubs, yacht clubs, hiking clubs, recreational sports leagues, sororities & fraternities, book clubs, alumni associations, country clubs, garden clubs, and so on.
The first step in this process is to find volunteers. You will need a board of directors, consisting at a minimum of a president/chair, secretary, and treasurer (and the president cannot be the treasurer). At this point, there are two paths you could choose: to incorporate (a formal existence), or to remain an unincorporated association. Either can be 501(c)(7) entities, and there are pros and cons to both.
INCORPORATED CLUBS. If you want to incorporate, you will need to file as a nonprofit organization with the State of Washington. That costs $50 if you do it online, or $30 if you do it by mail. To fill out the form, you need to know who will be the registered agent for the organization and who the initial board members are. This person’s street address is publicly available so that they can receive service of process on behalf of the club, in the unlikely event that the club is sued.
There are certain clauses that you need to have in your organizing documents to ensure that you receive tax-exempt status -- a nondiscrimination clause, a clause against self-dealing and conflicts of interest, and a purpose clause that says you are formed for an exempt purpose (here, for recreation and social opportunities of the membership). After you submit your paperwork to the State of Washington, the Secretary of State will send you a certificate of incorporation, that will list your Unified Business Identification (UBI) number. You can then get an Employer Identification Number (EIN) from the federal government (even if you don't intend to hire employees). Both numbers are necessary for getting bank accounts in the name of the club as an incorporated club.
The benefit to being formal is that your existence is confirmed by the Secretary of State, there are corporate protections for your board, and your organization will exist in perpetuity. The drawback is that you will need to file an Annual Report with the Secretary of State every year (the current fee $10) and you will need someone to be the Registered Agent (or pay for a commercial service).
UNINCORPORATED ASSOCIATIONS. To be an unincorporated association, skip the paperwork with the Secretary of State and go to the IRS to request an Employer Identification Number (EIN). Click on the options for nonprofits or other and be sure to select that you are an authorized officer or representative of the organization.
The benefits of this process is that it’s super easy and cheap to set up. The biggest drawback is that there is less liability protection for your board members, but additionally, some banks won’t open a bank account for unincorporated associations or they may impose additional constraints, like a minimum balance or minimum/maximum transactions per month.
SETTING UP BANKING. To set up your business bank accounts, contact the financial institution of your choosing and set up an appointment to open an account. You may need to call around first to see if the bank will offer business checking for your type of club. At least two people must attend that meeting — typically the president and the treasurer — so both can be signatories on the account, and they will need to bring two forms of ID (usually a driver’s license or passport AND a social security card, but check with your bank first). You also need to bring your certificate of incorporation (if you have one), your EIN paperwork, your bylaws, and recent minutes showing that the two people in the meeting have been approved by the board to open the account.
ARE WE TAX EXEMPT? It’s possible that your club may have some or all of this already. Even if you already have articles of formation, now is the time to make sure that you have all the necessary clauses to be granted tax-exempt status. If there isn’t a clause about anti-discrimination, for example, now is the time to formally amend the articles and update them with the State of Washington — before you file for tax-exemption with the IRS.
There are two ways to go about getting 501(c)(7) status: asking for it, and claiming. A 501(c)(7) is allowed to self-report their tax-exempt status without applying for tax-exempt status first. You do this by filling your annual Form 990 and claiming that you are a 501(c)(7) organization. This is a valid option, especially if you are remaining as an unincorporated association.
However, if you are incorporated, we recommend applying for 501(c)(7) status. It can be really helpful to have that grant from the IRS in order to fundraise — for example, on AmazonSmile or with employer-matching. To apply, you need to fill out IRS Form 1024. It looks long, but many of the pages don't apply to 501(c)(7) entities. There is a fee of $600 for the IRS for this one. You will need to describe the club’s activities, list the names of your board members and officers, list the salaries for your top five employees (if you have any), the annual budgets for the last couple years (or projected budgets, if a new entity), and disclose your assets and liabilities. It’s a long document, but the information should be relatively easy to collect.
ONGOING REPORTING REQUIREMENTS. Congratulations, you’re a 501(c)7) organization! However, you can lose this status if you fail to file your annual forms. If you are incorporated, you will need to fill out an annual report for the State of Washington, as mentioned above. It’s very simple and straight forward. Whether you are incorporated or not, you will need to fill out the IRS Form 990. Form 990 is free so long as your gross receipts are less than $50,000 (well, free in the sense that filing your taxes is free if you didn’t have much income that year). There is also an EZ version for clubs with gross revenue less than $200,000 annually. If you fail to submit a Form 990, it can cause you a lot of headaches. There are late fees that can apply, and if you fail to submit for three years, then you will automatically lose your tax-exempt status. This is one of the most important duties of the treasurer (typically) but can be assigned to any officer or you can outsource it to a CPA.
If you are an officer in a social club and have questions about obtaining or maintaining your nonprofit and/or 501(c)(7) status, give us a call at 253.858.5434 to set up an appointment today. We represent clients throughout Washington and Idaho and are available to meet in person, by phone, or via video conference.