501 C 7 Corporation: Everything You Need to Know
A 501 (c)(7) corporation is formed for nonprofit purposes and is the usual mode of incorporation for most social organizations and recreational clubs.4 min read
2. What Is a Corporation?
3. Social and Recreational Clubs
4. Limited Membership Without Discrimination
5. Support for Organization
A 501 (c)(7) corporation is one that is formed for nonprofit purposes. Frequently, social organizations and recreational clubs will incorporate under a 501(c)(7) classification with the Internal Revenue Service (IRS).
What Is a 501(c)(7) Corporation?
There are several types of tax-exempt organizations under the IRS, and a 501(c)(7) corporation is one of them. Specific types of nonprofit organizations that can request tax-exempt status include:
- Labor organizations
- Credit unions
- Business leagues
- Civic leagues
- Cemetery organizations
Such organizations frequently choose to incorporate, but they are able to use a different business structure if they feel it's a better fit.
What Is a Corporation?
Corporations are businesses that are owned and operated by shareholders. The IRS and state governments treat corporations as separate entities from their owners and afford them the same rights as many citizens.
A corporation can pursue legal action against another and can be sued. They are taxed as their own entity rather than as a pass-through entity. This means that corporations are subject to double taxation, as they are taxed at the company level, and their shareholders are taxed on dividends.
The shareholders of a corporation benefit from the corporate veil which gives them liability protection.
Nonprofits are a type of corporation, but with some differences. A nonprofit cannot have shareholders according to Section 501(c) of the IRC (Internal Revenue Code). This makes sense because shareholders are meant to share profits, and nonprofits, by definition, have no profits. If the organization does turn a profit, the owners are required to put the money back into the organization in some way rather than keeping it for personal gain.
Double taxation is also not an issue for nonprofits, because they are tax exempt.
Social and Recreational Clubs
The IRC Sections 501(c) includes some description of what types of organizations are considered nonprofits. They include charitable organizations, social clubs, and recreational clubs. The most well-known nonprofits, like the Girl Scouts and Red Cross, tend to be charitable, but not all are.
Sections 501(c)(7) allows for non-charitable nonprofits. These organizations must hold to the specific purpose of recreation or other nonprofitable goals in order to remain tax exempt. Congress's reasoning behind allowing such organizations exemption from taxes is that people don't pay taxes to gather and enjoy each other normally, so they shouldn't have to pay taxes if they want to gather and recreate as an official organization.
Social and recreational clubs under 501(c)(7) status are not required to prove public benefit or services. They can build and operate swimming pools, golf courses, and clubhouses. They can organize functions for different hobbyists and run yacht clubs. Their public service is entertainment, in a way.
Typical social clubs include:
- Country clubs
- Hunter's associations
- Amateur sports clubs
- Alumni associations
- Hobbyist clubs
- Garderning clubs
In order to qualify for 501(c)(7) status, social organizations must maintain limited membership. This status is beneficial to such clubs because they aren't required to pay any taxes on their regular activities.
Limited Membership Without Discrimination
Even though these clubs must have limited membership, they may not discriminate based on skin color, race, gender, or religion.
In some cases, clubs are allowed to limit membership to believers of a certain religion, but only if they are doing so in order to teach that religion to the members and not simply to keep other races or genders out of their club.
Limited membership for tax-exempt social clubs should make sense. For example, it makes sense to keep membership in a sorority exclusive to females at a specific school or an alumni club exclusively for alumni of a certain school. However, it doesn't make sense to make an alumni club exclusive to only males, so that could be considered discriminatory.
The facilities in a club must be keep to members only and their family and guests in order to maintain 501(c)(7) tax benefits.
Support for Organization
The support for 501(c)(7) corporations must come from donations or fees paid by members of the organization. These organizations cannot host activities for financial gain.
There are other ways that a 501(c)(7) organization can support itself. They can charge members to use their facilities, like a country club requiring payment to use their building for a wedding. Nonmembers can also be charged for facility use, but only 15 percent of the club's income can be from charging nonmembers for facility use.
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