Having a 501c7 status allows groups to contribute financial resources toward a tax-exempt recreational purpose without paying additional taxes. In this article, we’ll share the requirements, pros and cons, and steps to start a 501c7 organization. We’ll also discuss how 501c7 organizations are funded and how to use Donorbox to raise more from donors.
Starting a 501(c)(7) organization might seem like a complicated process, but it doesn’t have to be. In this article, you’ll learn step-by-step how to start a nonprofit social club.
While receiving 501(c)(7) status for your organization might take some work, it can provide significant benefits.
Having 501(c)(7) status allows a group to contribute financial resources toward a tax-exempt recreational purpose (such as building a private community pool or hosting hobby-related social club events) without paying additional taxes.
A 501(c)(7) is a social or recreational club organization that meets Internal Revenue Service criteria for tax-exempt status under IRS Code 501(c)(7). 501(c)(7) organizations were initially granted exemption from federal income tax in the Revenue Act of 1916.
You might be surprised to learn that the category of “tax-exempt organizations” includes more than nonprofit charities and grant-making foundations.
The United States IRS Code, Section 501(c)(7) allows social clubs that meet certain criteria and complete the application process to be recognized as tax-exempt. These groups are membership organizations primarily supported by dues, fees, or similar charges paid by members.
In short: 501(c)(7) social clubs are funded by their members! By definition, these social clubs must be primarily supported by dues, fees, charges, or other funds paid by their members.
Additionally, a 501(c)(7) social club may receive up to 35% of its gross receipts, including investment income, from sources outside its membership while retaining tax-exempt status.
Within the 35% of gross receipts permitted from non-members, not more than 15% of the gross receipts should come from the use of a social club’s facilities or services by the general public.
501(c)(7) social clubs can also be subject to unrelated business taxable income. Under these rules, a 501(c)(7) can be taxed on some non-member income as well as investment income.
Want to dig into the details? Read more on page 5 of the IRS 501(c)(7) code.
501(c)(3) organizations must spend their income on activities that further their exempt purpose, which is a charitable cause.
A 501(c)(3) nonprofit can be a public charity or a private foundation. There are many types of 501(c)(3) nonprofits. They come in all sizes, with a wide variety of goals and programs.
Some examples of 501(c)(3) nonprofits include:
On the other hand, a 501(c)(7) social club’s exempt purpose does not have to be charitable, but it must be social or recreational and non-profitable. A 501(c)(7) can provide fun, relaxation, and networking opportunities, amongst other things.
Some examples of 501(c)(7) social club organizations include:
One important distinction between a 501(c)(3) and a 501(c)(7) organization is that 501(c)(7)s exist primarily to serve their members – not the general public. If a 501(c)(7)7 does serve the public, they must be very careful to follow IRS guidelines (noted in the section above, How Are 501(c)(7) Social Clubs Funded?).
The Internal Revenue Service outlines a number of requirements for an organization to qualify to apply as a 501(c)(7) social club. Before you apply, it’s important to make sure your group meets each of the requirements.
501(c)(7) Social Club Requirements:
*A club may in good faith limit its membership to members of a particular religion in order to further the teachings or principles of that religion; the group may not exclude individuals of a particular race or color.
Before submitting your 501c7 application, it’s a good idea to become familiar with the pros and cons of securing 501c7 status.
Starting a 501(c)(7) requires careful attention and planning – but it doesn’t have to be a process you dread. Below, you’ll find a step-by-step guide to walk you through the process.
Review the guidelines above and found on the IRS Social Club web page to confirm that your social club is eligible to apply for 501(c)(7) status.
Depending on what type of 501(c)(7) social club you’d like to create, your members might include neighbors, friends, classmates, colleagues, or online friends.
Your board of directors should include people who are willing and able to spend time on the organization. Include a president/chair, secretary, and treasurer.
Your board of directors can work together to create your bylaws and articles of incorporation. Be mindful of any state or city-specific requirements when drafting these documents. Engaging a local attorney who specializes in tax-exempt organizations can help ensure compliance.
It can be helpful to keep your social club’s finances separate from your personal ones. For that purpose, you can create a Non-Profit Organization Employer ID Number (EIN) with the IRS in order to set up a business bank account.
Even though it’s referred to as an Employer ID Number, you don’t need to employ anyone to get an EIN. This is simply a tool that allows you to set up a business bank account. You’ll need to provide some personal information, including a social security number, for the organization’s main contact.
IRS Form 1024 is the application for recognition of exemption under Section 501(a). At 22 pages, this form may look daunting. However, you won’t need to fill out every single section for a 501(c)(7) organization.
Depending on your situation, it may be worth hiring a legal expert to help guide you through the paperwork. That said, many people choose to go the DIY route and navigate these forms on their own with success.
You’ll need to fill out an IRS Form 990 on an annual basis to ensure ongoing compliance for your 501(c)(7) organization. There are several types of 990 forms. The type you must fill out is dependent on your organization’s gross receipts.
An online fundraising solution like Donorbox can help you easily collect automatically recurring membership fees as well as crowdfund 501(c)(7) donations for special projects. Start now with no set-up fees, no monthly fees, and no contracts!
As part of the process of starting a 501(c)(7) organization, you’ll create and file your club’s by-laws along with your articles of incorporation.
Bylaws are a set of rules that govern your social club and describe how your organization will administratively function. Your bylaws will generally list the purpose of your organization, its governing structure and leadership roles, membership eligibility and joining process, the process for evaluating and collecting dues, etc.
A few by-law mistakes to avoid when starting a 501(c)(7):
If you’re afraid of making an error, consider hiring an attorney who specializes in guiding tax-exempt organizations through the application and compliance processes. While hiring professional help can sometimes be a short-term financial challenge, it can save your group money, time, and frustration in the long run.
While membership dues must comprise the majority of your 501c7 organization’s income, you can still harness the power of crowdfunding for your 501(c)(7) social club.
For example, a crowdfunding campaign amongst your existing members can help boost your progress toward a specific goal or project. Or, during times of emergency or unanticipated need, a crowdfunding campaign can help encourage members to voluntarily increase their dues.
Pro tip: When creating a crowdfunding campaign, display a “goal thermometer” showing progress toward your goal. Be sure you’re also allowing contributors the option to display their names or stay anonymous – whichever they prefer.
A trusted fundraising platform like Donorbox can help your 501(c)(7) seamlessly navigate crowdfunding. You can create your dedicated crowdfunding campaign, like the page pictured above, in just 15 minutes. Click here to learn more and get started.
The Rolla Alumni Chapter of Beta Sigma Psi is a 501(c)(7) organization that helps shape the undergraduate experience of students to turn them into young leaders of tomorrow. The Beta Sigma Psi fraternity was started in 1925 by Christian men and they have a dedicated chapter for each university they support. The below donation campaign was started to help the Rolla Alumni chapter with a new pledge or a pledge installment from their existing donors.
As you can see, the donation form has one-time as well as recurring intervals, suggested donation amounts, a dropdown option to designate donations, and a checkbox to make tribute donations. They have mentioned that they’re a 501(c)(7) org and that donations are not tax-deductible. It’s a simple donation page with a minimalistic design but an effective donation form.
We’ve answered the common questions regarding 501c7 organizations to help you get started with ease.
Simply put, because Congress has determined that it is permissible. Through a 501(c)(7), individuals can join together and provide themselves with recreational or social opportunities without additional tax consequences.
Yes, like other tax-exempt entities, a 501(c)(7) social club must file an annual return each year. The type of Form 990 is contingent on gross receipts and other factors. To learn more, view the IRS’s Form 990 Resources and Tools.
A 501(c)(7) must be primarily supported by dues, fees, charges, or other funds paid by members. That said, 501c7 donations are permissible. A 501c7 social club may receive up to 35% of its gross receipts, including investment income, from sources outside its membership while retaining tax-exempt status.
Within the 35% of gross receipts permitted from non-members, not more than 15% of the gross receipts should come from the use of a social club’s facilities or services by the general public. Get the full details on page 5 of the IRS 501c7 code.
While a 501(c)(7) social club may not discriminate against any person on the basis of race, color, or religion, a club may in good faith limit its membership to members of a particular religion in order to further the teachings or principles of that religion.
While it may take some time and energy to apply for and receive your 501(c)(7) status, many people report that the process was worth the work. We wish you well on your journey toward tax-exempt status and growing your recreational club.
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Heather is a writer, business owner, and nonprofit professional. She is a Certified Fund Raising Executive (CFRE) with more than a decade of experience leading fundraising efforts and creating communication materials for arts, education, and social services nonprofits.
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Heather Karellas