Key Takeaways

  • Mutual benefit organizations serve their members rather than the general public.
  • They can take many forms, including homeowners' associations, trade associations, and clubs.
  • Unlike public charities, mutual benefit organizations are not eligible for 501(c)(3) status.
  • Mutual benefit organizations can apply for tax exemptions under 501(c)(4), 501(c)(6), or other applicable codes.
  • They offer greater flexibility in political activities and use of revenue than public benefit nonprofits.
  • Forming a mutual benefit corporation involves state filings, board formation, bylaws, and tax ID applications.
  • Upon dissolution, remaining assets can be distributed to members, unlike with public charities.

A mutual benefit organization example is an entity that benefits a select group of people. It shares some of the same underlying features as a public benefit corporation, but its mission is more narrowly focused, with a select class of beneficiaries. Mutual benefit organizations benefit their members, providing services and insurance solely for those members.

It's not a rule that every nonprofit must benefit the general public. In fact, not every nonprofit is a charity. In a mutual benefit nonprofit organization, all the generated revenue goes to a select class of members. Also, the revenue in these types of organizations tends to come from the members, not the public.

Types of Organizations

Organizations are classified based on their nature and purpose. In 1964, Blau and Scott created a classification system for organizations. They called it a "who benefits" typology. There are four classifications:

  1. Business organizations.
  2. Nonprofit organizations.
  3. Mutual benefit organizations.
  4. Commonwealth organizations.

Each of these types of organizations has a different set of beneficiaries. Blau and Scott assert that each type also has its own set of problems that need to be handled through specific organizational strategies.

Distinguishing Features of a Mutual Benefit Corporation

There are two distinguishing features that make nonprofit mutual benefit corporations stand out from other nonprofits and for-profits. They are:

  • The only way members can receive assets is upon the dissolution of the corporation. They cannot receive assets while the corporation is operating.
  • Mutual benefit corporations may be set up for any lawful purpose, not limited to public or charitable causes alone.

A for-profit corporation, for example, may distribute its assets to the shareholders throughout the course of its operation. This may be done through dividends. But you won't see this happen in a mutual benefit corporation.

Membership and Control in Mutual Benefit Organizations

Mutual benefit organizations may be structured as membership or nonmembership corporations. In membership organizations, members typically have the right to vote on key decisions, such as board appointments, bylaws amendments, and even dissolution. This democratic structure is common among professional associations and unions.

In contrast, nonmembership mutual benefit organizations are governed solely by the board of directors. While they may use the term "member" in a promotional sense—such as for donors or subscribers—these individuals typically lack formal voting rights. This model offers streamlined governance, but may reduce engagement and accountability.

Understanding this distinction is important when drafting bylaws and setting expectations for participation and decision-making authority.

Examples of Mutual Benefit Organizations

Some examples of mutual benefit organizations include:

  • Chambers of commerce.
  • Labor unions.
  • Business leagues.
  • Teacher associations.
  • Homeschool support groups.
  • Associations.
  • Community clubs.
  • Veterans groups.

Typically, people join mutual benefit organizations to fulfill their need for affiliation or association, and membership is intended to strengthen the organization.

History shows that mutual benefit organizations are prone to conflict. Dissatisfaction among the members can become a major cause for concern. If members feel that their needs are not being met, they will quit their membership. This makes the failure rate for mutual benefit entities higher than for the other types.

Common Purposes and Activities

Mutual benefit organizations serve a wide array of purposes tailored to their members' interests. Common goals include:

  • Providing networking and education opportunities for professionals (e.g., bar associations, medical societies).
  • Offering insurance or financial benefits to members (e.g., mutual insurance companies).
  • Advocating for industry-specific policies (e.g., trade associations).
  • Organizing community-based activities such as sports, arts, or cultural programs (e.g., local clubs and fraternal organizations).

They may also sponsor events, publish newsletters, and facilitate cooperative buying programs. Despite not being organized for public benefit, these activities often produce broader social value through community-building and economic coordination.

How to Form a Mutual Benefit Organization

Forming a mutual benefit organization is much like forming a charitable nonprofit. The main difference between the two is that you don't need to obtain a charitable registration or 501(c)(3) tax exemption for mutual benefit organizations.

To form a mutual benefit nonprofit, you'll need to complete the following steps:

  1. Select a name that follows state requirements.
  2. Assemble a team of people to manage the nonprofit as board members and directors.
  3. Create bylaws to govern the nonprofit. Outline how assets will be disseminated if the mutual benefit organization should dissolve.
  4. Nominate and select a registered agent who will accept official documents on behalf of the nonprofit.
  5. File articles of incorporation with the secretary of state.
  6. Set a date for your first meeting. In this meeting, you will adopt bylaws, elect directors, and nominate a treasurer, president, and other essential officers.
  7. File an initial or annual report, whichever your state requires.
  8. Apply for an EIN with the IRS.
  9. Draft a corporate resolution, and select one member of the board who will have the authority to open a bank account. You will need the corporate resolution in order to open the bank account.
  10. Collect dues from all members, and start funding the mutual benefit organization.

Important Legal Considerations

When forming a mutual benefit organization, it’s crucial to observe the following legal nuances:

  • Correct Entity Classification: Use the appropriate articles of incorporation form. For instance, California requires Form ARTS-MU for mutual benefit corporations.
  • Purpose Clause: Clearly state that the organization is formed for mutual benefit purposes, not charitable ones.
  • Distribution Clause: Include language about asset distribution upon dissolution, explicitly allowing assets to be returned to members, which distinguishes it from public charities.
  • Nonprofit Status vs. Tax-Exempt Status: A nonprofit corporate structure does not automatically confer tax exemption. Mutual benefit corporations typically apply for exemption under 501(c)(4), 501(c)(6), or another subsection, not 501(c)(3).

Consulting an attorney ensures these formalities are properly handled to avoid compliance issues later.

Taxes for Mutual Benefit Organizations

Because mutual benefit organizations do not operate to benefit the general public, they are not looked upon as charities. This makes them ineligible for 501(c)(3) tax exemption. Public benefit and religious nonprofits, on the other hand, must apply for 501(c)(3) tax exemption with the IRS.

Mutual benefit organizations are generally formed as C-corporations or for-profit organizations. This is why mutual benefit organizations tend to charge members only a nominal amount of money in order to fund their operations.

Political Activity and Lobbying

Unlike 501(c)(3) charities, mutual benefit organizations typically have greater latitude in engaging in political activities. Depending on their IRS classification:

  • A 501(c)(4) social welfare organization may engage in lobbying and political campaigns, provided it remains primarily focused on promoting member welfare.
  • A 501(c)(6) trade association may advocate for industry interests, support legislation, and engage in substantial lobbying.

However, these activities must still align with the organization's stated mission and purpose. Legal counsel is advised before initiating political or legislative efforts to avoid endangering the organization’s tax-exempt status.

Fundraising and Donor Communication Requirements

Mutual benefit organizations face different fundraising rules than charitable nonprofits. Key points include:

  • Donations Are Not Tax-Deductible: Contributions to a mutual benefit organization are generally not tax-deductible for the donor.
  • Disclosure Requirement: Organizations must clearly state that contributions are not tax-deductible when soliciting funds.
  • Charity Registration Not Always Required: In some states, mutual benefit organizations may avoid charitable solicitation registration if the fundraising explicitly benefits only members.

These organizations often fund themselves through member dues, event fees, and service charges, rather than public appeals or grant funding.

Frequently Asked Questions

1. What is the difference between a mutual benefit organization and a public benefit nonprofit? A mutual benefit organization serves its members, while a public benefit nonprofit exists to serve the general public.

2. Can a mutual benefit organization be tax-exempt? Yes, but not under 501(c)(3). They may qualify under 501(c)(4), 501(c)(6), or another section of the IRS code.

3. Are donations to mutual benefit organizations tax-deductible? No, contributions to mutual benefit organizations are not typically tax-deductible for the donor.

4. Who can form a mutual benefit corporation? Anyone with a lawful mutual benefit purpose can form one by filing articles of incorporation and meeting state-specific requirements.

5. Can mutual benefit organizations engage in political activity? Yes, they have more freedom than public charities, but must follow IRS guidelines based on their tax-exempt classification.

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