Your Club as a Business – Legal Status
Forming a club is more than just meeting and having a good time. Expenses are involved and dues are assessed to cover the expenses. Do you use your personal bank account? Do you set up a club account? The answer to these questions involves personal and tax liability consequences. In general, if you wish to open a bank account in the name of an organization, the bank will require some form of documentation the account is for a legitimate organization. Also, if your organization is focused on supporting your favorite wheeling area, the land management agency will require you to sign volunteer agreements and other documents - some of which require the signature of an officer of the organization. It is good practice to establish legal basis for your club and limit your personal liability.
This leads to incorporating your club as a formal organization complete with articles of incorporation, by-laws, and officers. In general, for clubs there are two avenues recognized by the Internal Revenue Service as legal structures: 501(c)(3) non-profit organization and 501(c)(7) recreational club organization. The choice depends on the underlying reason you have formed your club; each has advantages and disadvantages.
A nonprofit is created with a stated mission describing the nature of its contribution to society and engages in programs and activities that support the mission. In the general terms, a nonprofit is defined as an organization that does not have owners who profit when revenues exceed expenses. In other words, a nonprofit may make a "profit," but it does not distribute its profit to individuals or shareholders as a for-profit organization would. The formal structure of incorporation puts the mission of the nonprofit above the personal interests of individuals associated with it. As such, under law, creditors and courts are limited to the assets of the nonprofit. Founders, directors, members, and employees of the nonprofit are not personally liable for the nonprofit’s debits.
Organizing as a nonprofit public charity under Internal Revenue Code 501(c)(3) provides exemption from payment of federal corporate income tax. Once exempt from this tax, the nonprofit is usually exempt from similar state and local taxes. Tax exemption is not automatic. Application for tax-exempt status to the IRS and to appropriate state and local governments is required. Because a 501(c)(3) organization is a legal entity, detailed records are required and certain records must be prepared and filed in specific manner with certain deadlines with state and federal agencies.
As a formal nonprofit organization is eligible for public and private grants and allowed to solicit donations from the public, a potential tax benefit to individuals. Many foundations and government agencies restrict their grants to public charities.
Creating a nonprofit organization takes time, effort, and money. Because a nonprofit organization is a legal entity under federal, state, and local laws, the use of an attorney, accountant, or other professional may well prove necessary.
While you may have created the organization with a specific goal and would like to guide the organization, individual control of a nonprofit is limited. A nonprofit organization is subject to federal and states laws and regulations, including its own articles of incorporation and bylaws. In general, the nonprofit is required to have several directors, who are the only people allowed to elect or appoint the officers who determine policy. A nonprofit is dedicated to the public interest; therefore, its finances are open to public inspection.
A 501(c)(3) nonprofit organization may not participate in political activity, including endorsing candidates. While a nonprofit organization may promote legislation, if it spends a significant amount of time in lobbying activities, it could lose its tax-exempt status.
While a 501(c)(3) organization social activities must be insubstantial to its overall mission and political activities are prohibited, a 501(c)(7) organization social activities must be primary and political activities are permitted.
A 501(c)(7) recreational club organization is permitted to receive up to 35% of its gross receipts, including investment income, from outside of its membership without losing its tax-exempt status.
The existence of outside income can operate to deprive a social club of its exempt status. The general test is whether the club generates revenue from non-members, the use of which is used to the personal advantage of the members (such as reduced dues, improved facilities, and the like).
There are other IRS incorporation categories available and legal assistance is encouraged to ensure the correct method is selected and correct required paperwork is filed with state and federal agencies.
Start with a plan. A plan forces you to clarify your goals and how much money (time) you are willing to commit. Start with an idea. Develop the idea. Your time is the key asset to make the club a success. Set goals, be involved, and invest your time and energy wisely.