Most people researching how to start a nonprofit find information about 501(c)(3) charitable nonprofits and stop there.
However, not all nonprofits qualify as a 501(c)(3) and some need to apply using another 501(c) entity type. 501(c)(3)s are exclusively geared toward nonprofits seeking to advance a charitable cause.
If you are building a club, usually 501(c)(3) is the wrong route.
But what is a 501(c)(7) club?
A 501(c)(7) is a tax-exempt social or recreational club. Instead of advancing a charitable cause, it exists for the pleasure and recreation of its own members, and it is funded principally by those members through dues, fees, and assessments.
That is the whole idea, and it is the key difference from a charity. A 501(c)(3) must serve the public. A 501(c)(7) serves its members.
Typical examples of a 501(c)(7) include golf and country clubs, tennis and swim clubs, gun and hunting clubs, car clubs, supper and dining clubs, hobby and gaming clubs, amateur sports clubs, and many fraternal-style social organizations.
What the IRS requires
To qualify as a 501(c)(7), the entity must be:
Organized for pleasure, recreation, or similar nonprofitable purposes. The point is the shared activity, not profit and not charity.
Built on genuine personal contact among members, with limited membership. A club whose “members” never actually meet, or which admits anyone who pays, starts to look like a business with a mailing list rather than a club.
Supported by membership dues, fees, and assessments. The members fund it. That is what makes it theirs.
Free of private benefit. No part of the net earnings may benefit any private individual. The club can pay reasonable compensation for actual services, but it cannot be a vehicle for enriching the people running it.
Free of prohibited discrimination in its governing documents. A club whose bylaws discriminate on the basis of race, color, or religion cannot hold exemption. This is a drafting point that has to be got right at the start.
The number that catches people: 35 and 15
A social club is meant to be funded by its members. The IRS allows some outside money, but within limits, and it is important to be aware of this before you plan your 501(c)(7).
Maximum share of gross receipts from nonmember sources, including investment income.
Maximum share of gross receipts from nonmembers using the club’s facilities or services.
Both are measured against gross receipts. The 15% sits inside the 35%, not on top of it.
If you exceed those numbers you do not necessarily lose exemption automatically. The IRS will look at all the facts and circumstances to decide whether the club is still substantially operated for exempt purposes.
This is the reason a club cannot quietly turn its restaurant, bar, or hall into a public-facing business. Renting the ballroom to the general public every weekend is exactly the activity these percentages are designed to limit.
Exempt does not mean untaxed
A 501(c)(7) is exempt on member income, but it is taxable on two things:
Money from the members themselves.
- Membership dues
- Fees and assessments
- Charges to bona fide guests of a member
Money from everywhere else.
- Income from nonmembers who are not bona fide guests — spending it on club purposes does not change the answer
- Investment income. Interest and dividends on the club’s reserves are generally taxable, unlike a 501(c)(3)
A club with $1,000 or more of gross unrelated business income files Form 990-T and pays tax on it, in addition to its annual information return.
A 501(c)(3) must serve the public. A 501(c)(7) serves its members. Who is this for, and who pays for it?
The recordkeeping is not optional
If your club lets nonmembers use the facilities, the IRS expects records for each event: the date, how many people were in the party, how many were nonmembers, the total charges, the charges attributable to nonmembers, and who actually paid. Where a member covers a nonmember’s charges, you need a signed statement about whether the member was or will be reimbursed.
The consequence of not keeping these records is the part to pay attention to. Without records that distinguish types and sources of income, the IRS presumes all of it is unrelated income and taxes it accordingly. Sloppy bookkeeping does not create a grey area here; it creates a default answer, and the default is against you.
Why someone would want one
Because your group is genuinely for its members. A neighborhood swim club, a sportsman’s club, a supper club. The people who benefit are the people who pay, and there is nothing wrong with that. However, this type of group is not formed to advance a charitable cause. Pretending otherwise creates problems.
Because you want to control membership. Limited membership is not a defect for a 501(c)(7); it is a requirement. A 501(c)(3) generally cannot restrict who benefits in the same way.
Because dues should not be taxable income. Without exemption, an unincorporated group collecting dues and running a bank account has a tax problem nobody wants to think about. Exemption puts the club on a clean footing.
Because formalizing protects the people running it. Incorporating and adopting real governing documents separates the club’s liabilities from the organizers’ personal assets, and settles in advance who decides what.
Why someone would not
Donations are not deductible. A gift to a social club is not a charitable contribution. If your funding model depends on donors claiming a deduction, this is the wrong section.
Grants are largely unavailable. Most grants are intended exclusively for 501(c)(3)s. A social club is generally outside their eligibility rules.
Your outside revenue is capped. If the plan is a members’ club that also runs a substantial public business, the percentages above will constrain you.
If any of those are dealbreakers, the honest conversation is whether your purpose is actually charitable, educational, or recreational-for-the-public. If that is the case, a 501(c)(3) may be right after all.
How you actually get there
The sequence looks much like any other nonprofit. Choose a name and check it is available. Incorporate with the state, with governing documents drafted for this specific section. Get an EIN. Adopt bylaws and the policies your club actually needs. Apply to the IRS for recognition of exemption on Form 1024.
One difference worth knowing: unlike charities, social clubs are not required by statute to obtain an IRS determination in order to be treated as exempt. Many still apply, because a determination letter is what banks, insurers, landlords, and members’ accountants ask to see. It is a decision worth making deliberately rather than by default.
After that, the club files an annual 990 every year, files Form 990-T if it has $1,000 or more of unrelated business income, and keeps the nonmember records described above.
The question to answer first
Before any of the paperwork, there is one question that decides everything after it.
Who is this for?
Answer honestly. Everything else follows from here.
Serves the public. Donations are deductible and most grants are open to you, but you cannot restrict who benefits.
Serves its members, funded by their dues. You control membership, but donations are not deductible and grants are largely closed.
Not sure? That is the hour of advice worth paying for. The structure is far cheaper to choose correctly than to change later.
You can read more about how we handle these on our 501(c)(7) social club formation page.
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This article is general information, not legal advice, and reading it does not create an attorney-client relationship. Rules differ by state and change over time. Please speak with a licensed attorney about your own situation.