Starting a 501c7 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 501c7 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.
Read on to learn:
- What is a 501c7 organization?
- How Are 501c7 Social Clubs Funded?
- 501c3 vs 501c7: What’s the Difference?
- Requirements of a 501c7 Social Club
- Pros and Cons of 501c7 Social Clubs
- 8 Steps to Start a 501c7 Organization
- By-Laws to Avoid When Creating a 501c7
- Don’t Just Rely on Membership Dues for Funding
- Frequently Asked Questions (FAQs) About 501c7s
What is a 501(c)(7) Social Organization?
A 501c7 is a social or recreational club organization that meets Internal Revenue Service criteria for tax-exempt status under IRS Code 501(c)(7). 501c7 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 for 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.
501c7 organizations can include:
- College social/academic fraternities and sororities
- Country clubs
- Amateur hunting, fishing, tennis, swimming, and other sport clubs
- Dinner clubs that provide a meeting place library, and dining room for members
- Variety clubs
- Hobby clubs (such as a book club, chess club, gardening club, etc.)
- Homeowners or community associations whose primary function is to own and maintain recreational areas and facilities
How Are 501c7 Social Clubs Funded?
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 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.
501(c)(7) social clubs can also be subject to unrelated business taxable income. Under these rules, a 501c7 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 501c7 code.
501c3 vs 501c7: What’s the Difference?
501(c)(3) organizations must spend their income on activities that further their exempt purpose, which is a charitable cause.
A 501c3 nonprofit can be a public charity or a private foundation. There are many types of 501c3 nonprofits. They come in all sizes, with a wide variety of goals and programs.
Some examples of 501c3 nonprofits include:
- Boys & Girls Clubs of America
- Feeding America
- The New York City Ballet
- Georgia Aquarium
- Stanford University
- The Humane Society of the United States
- Nature Conservancy
- Task Force for Global Health
- St. Jude Children’s Research Hospital
- Catholic Charities USA
On the other hand, a 501c7 social club’s exempt purpose does not have to be charitable, but it must be social or recreational and non-profitable. A 501c7 can provide fun, relaxation, and networking opportunities, amongst other things.
Some examples of 501c7 social club organizations include:
- Gamma Phi Beta sorority
- Atlanta Country Club
- Apostle Islands Yacht Club
- Garden to Table Club
- Whitpain Greens Swim Club
- Glebe Harbor Cabin Point Association
- Wildwood Acres Association
One important distinction between a 501(c)(3) and a 501(c)(7) organization is that 501c7s exist primarily to serve their own members – not the general public. If a 501c7 does serve the public, they must be very careful to follow IRS guidelines (noted in the section above, How Are 501c7 Social Clubs Funded?).
Requirements of a 501c7 Social Club
The Internal Revenue Service outlines a number of requirements for an organization to qualify to apply as a 501c7 social club. Before you apply, it’s important to make sure your group meets each of the requirements.
501c7 Social Club Requirements:
- The primary purpose and activities of the club must be for the pleasure and recreation of its members. The club must not claim to provide goods or services to the general public.
- It must be primarily supported by membership fees, dues, and assessments, with a limited amount of income from nonmembership sources and investment income.
- The club must have an established and limited membership of individuals.
- It must provide its members with the opportunity for personal contact and fellowship amongst each other.
- The club’s earnings may not be used for the private benefit of any particular person, outside the general benefits to members of pleasure and recreation.
- The club’s written policies 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; the group may not exclude individuals of a particular race or color.
Pros and Cons of 501c7 Social Clubs
Before submitting your 501c7 application, it’s a good idea to become familiar with the pros and cons of securing 501c7 status.
Advantages of starting a 501c7 social club
- Becoming a tax-exempt organization can allow club members to pool funds together for a shared recreational purpose.
- Having 501c7 status can give your social club credibility, which can be helpful when recruiting new members or partner organizations.
- Managing a social club provides an opportunity to exercise leadership skills, build administrative knowledge, and increase your familiarity with running an organization. This can be helpful for gaining resume experience and transferable career skills.
Potential downsides of starting a 501c7 social club
- Because a 501c7 is not a charitable organization, donors may not receive a tax deduction when they contribute funds. Social clubs generally describe their fees as “member dues,” not a tax-deductible donation.
- A 501c7 social club must maintain financial and administrative records. You’ll need to ensure you’re fulfilling 501c7 filing requirements and maintaining ongoing IRS compliance.
8 Steps to Start a 501c7 Organization
Starting a 501c7 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:
- Confirm that your organization meets the 501c7 requirements
- Establish a membership base
- Organize a board of directors
- Draft your bylaws and articles of incorporation
- Secure your EIN and bank account
- Apply for tax-exempt status by filing IRS Form 1024
- Fill out Form 990 to ensure ongoing compliance
- Set up a way to collect membership dues
1. Confirm that your organization meets the 501c7 requirements
Review the guidelines above and found on the IRS Social Club web page to confirm that your social club is eligible to apply for 501c7 status.
2. Establish a membership base
Depending on what type of 501c7 social club you’d like to create, your members might include neighbors, friends, classmates, colleagues, or online friends.
3. Organize a board of directors
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.
4. Draft your bylaws and articles of incorporation
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.
5. Secure your EIN and bank account
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.
6. Apply for tax-exempt status by filing IRS Form 1024
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.
7. Fill out Form 990 to ensure ongoing compliance
You’ll need to fill out an IRS Form 990 on an annual basis to ensure ongoing compliance for your 501c7 organization. There are several types of 990 forms. The type you must fill out is dependent on your organization’s gross receipts.
8. Set up a way to collect membership dues
An online fundraising solution like Donorbox can help you easily collect automatically recurring membership fees as well as crowdfund 501c7 donations for special projects. Start now with no set-up fees, no monthly fees, and no contracts!
By-Laws to Avoid When Creating a 501c7
As part of the process of starting a 501c7 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 501c7:
- Don’t create by-law guidelines that conflict with your local state law and ordinances.
- Avoid listing information in your by-laws, that conflicts with information in other internal documents for your organization, such as a member handbook or website.
- Remember to plan for unforeseen events, such as a board member’s resignation or a conflict amongst members.
- Don’t be too rigid! If your by-laws are extremely strict from the start, you might find that your organization’s flexibility is limited if circumstances shift.
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.
Don’t Just Rely on Membership Dues for Funding
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 name 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.
Frequently Asked Questions (FAQs) About 501c7:
We’ve answered the common questions regarding 501c7 organizations to help you get started with ease.
1. Why are social clubs allowed to apply for tax exemption?
Simply put, because Congress has determined that it is permissible. Through a 501c7, individuals can join together and provide themselves with recreational or social opportunities without additional tax consequences.
2. Do social clubs have to file annual returns?
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.
3. Can a 501c7 accept donations?
A 501c7 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.
4. Can a social club limit its membership to a specific religion?
While a 501c7 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 501c7 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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