What Is a 501(c)(6) Membership Based Nonprofit?

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The most common 501(c) nonprofit is the 501(c)(3) charitable organization. These groups include the Red Cross and United Way, as well as nonprofit hospitals and universities. But the IRS includes many other “nonprofits” under the umbrella of its 501(c) tax code. Like the charitable organization, other nonprofits enjoy a federal tax exemption as well as other benefits.

The 501(c)(6) designation includes membership-based organizations or clubs that promote the business interests of their members. Such organizations include trade associations and sports leagues. While charitable nonprofits must serve a public good and be supported by the public, a trade association and its cousins do not have to serve the public good. They can exist for the benefit of promoting the business interests of their members as long as their goal is not to make a profit. Thus, they can be called nonprofits.

Typical ways that a 501(c)(6) nonprofit promotes the business interests of its members include gathering and presenting industry data to governmental bureaus and agencies and lobbying for legislation supportive of the group’s mutual interests.

What are some other differences between charitable nonprofits and non-charitable nonprofits? A couple that stand out is that a 501(c)(6) does not need broad public support, just that of its members, nor widespread public recognition. 

Also, while charitable organizations are mostly prohibited from political activity, a 501(c)(6) may participate in limited political action such as endorsing or contributing to political candidates, although the money spent on such activities is taxable.

What Are Some Examples of 501(c)(6) Organizations?

There are several types of 501(c)(6) organizations, such as:

  •  Chambers of Commerce
  • Trade Associations
  • Real estate Boards
  • Professional associations
  • Pro Football leagues (these are business-based leagues, not amateur sports organizations, such as those included under the 501(c)(7) designation)
  •  Boards of trade
  •  Business leagues

All of these types of organizations have a business purpose. The IRS says that a business league must be an association of people with a shared business interest. The organization must serve the “common interests” of those members and must not engage in business for profit. The business league does not provide services for individuals, only the group.

In addition, a business league must represent an entire industry or industry segment within a particular area. That means that businesses with a specific brand would not qualify. On the other hand, chambers of commerce and boards of trade promote the interests of all businesses within a particular category in a given area, such as San Francisco or the greater Chicago area.

What Do You Need to Apply for 501(c)(6) Status?

Filling out IRS Form 1024 is necessary. It can be found online as well as what the current filing fee is. The information you will need for this form includes:

  • Organizational activities
  • Present and future sources of funding
  •  Names of officers and directors
  • Affiliations with other organizations
  •  Financial information
  • What services will be performed for members.
  • You’ll also need an EIN (Employer Identification Number)

Things to remember:

Just like charitable organizations, business associations will need to make everything public. These include your tax-exempt determination letter, your tax forms, your IRS application and supporting documents. Be prepared to provide these documents to anyone who asks for them. Consider posting them online when possible.

Nonprofit organizations, besides not making a profit, also must make sure that no one individual or shareholder benefits financially from the organization’s income. All net proceeds must be used for the purposes of the organization, such as serving its members’ interests.

Members of 501(c)(6) organizations must have a common business interest, and the organization must promote the welfare of that interest, not engage in the business itself. So a group of realtors would support favorable business conditions for their profession, not sell real estate itself. 

A nonprofit business group may accept unlimited contributions from corporations, individuals, and labor unions without disclosing names or amounts of specific donations. However, contributions are not tax deductible for an individual’s tax return. Donations may be deductible as business expenses. Members should pay dues to the organization, and those dues are usually considered business expenses and thus can be deducted.

In general, to meet the requirements of IRC 501(c)(6), organizations should have these characteristics:

  • Must be an association of persons with a common business interest and its purpose must be to promote this common interest.
  • Must be a membership organization and have a significant base of membership support. The IRS stipulates that membership support can be derived from any income from the performance of the organization’s exempt functions or from substantially related activities, and contributions from the general public. However, unrelated income should be excluded when measuring the extent of membership support. Unrelated income is that derived from activities not related to the organization’s exempt purpose.
  • Must not be organized for profit.
  • No part of net earnings may inure to the benefit of a shareholder or individual.
  • Activities must be directed to the improvement of business conditions rather than the performance of particular services for members.
  • Its purpose must not be to engage in a regular business that would ordinarily be carried on for profit.

Some examples of nonprofit business groups that qualify for 501(c)(6) designation include:

An organization that promotes the commercial fishing industry in a specific state through the publication of a newspaper and other information.

An organization formed to promote the development and free exchange of information about systems and programming of electronic data processing equipment. This group holds annual conferences and shares information.

An organization of business and professional women that promotes acceptance of women in business and the professions by sponsoring events about the problems of women in business.

Examples of groups that do not qualify for 501(c)(6) status:

An automobile association of auto owners and affiliated auto clubs did not qualify since its principal activity was to secure benefits and perform services for individual members.

A kennel club did not qualify because hobbies are not businesses. This club promoted the interests of hobbyists.

Resources:

This article is just for informational purposes. It is not intended to be legal advice. Check other sources, such as the IRS, and consult with legal counsel or an accountant.