501c7 vs 501c3: Club or Cause—What’s Your Type?

The choice of 501c7 vs 501c3 nonprofit can be confusing when you’re just starting out. Granted, this is true when choosing between any type of nonprofit organization, such as the 501c6 vs 501c3. Add other designations into the mix, and you’ve got yourself a confusing brew indeed.

In a nutshell, a 501c7 is a social club, while a 501c3 is a charity. However, it’s not always clear which you should choose for filling purposes, so knowing the key differences between both nonprofit organizations is vital. In today’s post, we will look at the benefits, tax structure, purpose and more of 501c3 and 501c7 organizations to help you choose the right one.

What is a 501c7 Organization?

A 501c7 organization — also written as 501(c)(7) — is a type of nonprofit entity geared toward social or recreational activities. Common examples are country clubs, sports organizations, sororities, fraternities, and hobbyists, typically under the 501c7 designation.

When deciding whether to start a nonprofit and considering the 501c7 vs 501c3, the main question to ask is whether you intend to serve your members or the public. If it’s the former, a 501c7 is the way to go, because you must adhere to certain legal and ethical guidelines in order to count as either. Thus, if you’re starting a club for pleasure, make sure you choose this designation.

Key Characteristics

Some hints that you need a 501c7 versus 501c3 include:

• Your goal is to collect dues and, in return, provide a benefit to paying members
• Most of your revenue will come from dues
• You don’t intend to do many, or any, events for non-members or the public
• Your purpose is geared toward recreation, fellowship or pleasure

Benefits

When looking at choosing a 501c7 vs 501c3, there’s some good news. First, even though you aren’t serving the public, your member dues and fees are still tax-exempt, at least for the most part. (Rules may vary by state.)

Second, although most of your revenue must come from members, you can still earn it from non-members as long as it stays below the threshold of 35 percent of total revenue.

Now, let’s take a look at what a 501c3 is and why you’d choose that instead of a 501c7.

What is a 501c3 Organization?

Note that as with the 501c7 designation, you may also see 501c3 written as 501(c)(3). The main reason you’d choose a 501c3 vs 501c7 is because you want to serve the public.

This can take many forms, including education, religion, science, or charity. The point is not what you do but rather for whom you do it: Your goal must be to advance public interests, not private ones.

Key Characteristics

Some signals that a 501c3 is the way to go include:

• You have a clear charitable cause that helps the public
• There’s no recreational angle to your nonprofit
• Your mission will rely on donations, funding, and volunteerism

Benefits

If you designate your nonprofit a 501c3, you will enjoy several tax benefits. First, you’ll enjoy tax-deductible donations, e.g., the donations you receive are exempt from taxation. You will also qualify for income tax exemption, so even if you make money through your nonprofit, you will not be taxed on it. Lastly, you secure grant eligibility, including local, regional, state, and federal grants.

Main Similarities and Differences Between 501c7 and 501c3 Organizations

Now, let’s take a quick look at these two nonprofit designations’ main similarities and differences.

Purpose

A 501c7 exists to serve a social need. It is there to benefit its members in a specific way. As long as it does so in a non-discriminatory manner, it can keep its tax-exempt status while providing services that range from golfing and biking to frats or cooking clubs.

Nonprofits designated 501c7 do not have to demonstrate a public benefit. A 501c3, on the other hand, serves only charitable purposes and must provide proof.

The main similarity between the two is tax exemption, which means that — unlike for-profit businesses — you do not have to send a significant chunk of your income (whether based on donations or dues) to the government.

Funding and Income

While many nonprofits start out with no money, you’ve got to make it at some point. Both types of organizations make their money via avenues other than the sale of goods or services, but from there, they diverge.

in the case of a 501c7, funding and income stem from membership dues, which gives members voting rights. Only 35 percent can come from non-members, though an additional 20 percent can come from other income streams (such as fundraisers).

A 501c3, on the other hand, earns its income through donations, grants, and fundraisers. None of this income is liable to taxation.

Membership

A 501c7 relies primarily on membership for funding and to dictate its activities. On the other hand, a 501c3 must demonstrate clear public benefits if it wants to keep its status.

IRS and Taxes

Both 501c7 and 501c3 nonprofits are tax-exempt and file using Form 990, which is their main similarity. As long as you follow a few basic rules, you can keep your nonprofit status, which is beneficial in many ways.

They are taxed differently, however. For one thing, 501c7 entities cannot write off donations, though they can write off some other forms of income, such as dues. On the other hand, 501c3 organizations can write off donations.

In addition, 501c7 entities do not have to disclose their annual earnings. Nonprofits classed as a 501c3, however, must disclose their activities and income.

Lobbying and Politics

Both 501c3 and 501c7 organizations can lobby, but there are strict rules regarding each:

1. A 501c7 can engage in lobbying, but said lobbying must always relate only to the activity for which the club was founded. The nonprofit must also treat it as a side gig, if you will; you can’t make it your primary activity.
2. A 501c3 can only engage in lobbying if it is completely nonpartisan and makes no attempt to influence the outcome of legislation. Thus, a charity could disseminate voter registration materials but not back a specific candidate.

In either case, the nonprofit’s board must ensure they understand the lobbying rules before engaging in any such activities. Nonprofits can, and have, lost their tax-exempt status for flouting or accidentally failing to follow these rules.

How to Start a 501c7

So you’re ready to start a social club, eh? Follow these steps, and you’ll be set up for success! Don’t worry; we’ll also cover starting a 501c3 in the next section.

Establish Purpose

First, you have to establish your purpose. This should follow directly from your nonprofit business plan. Who are you serving? What is the activity, hobby, or fellowship goal of your organization? What limitations will there be on membership?

Remember, while you can serve a niche membership, you must take careful steps not to discriminate. For example, as a religious organization, you could exclude members who don’t identify with your religion; you may not exclude people born in a country of a different religion.

Board and Bylaws

Next up, and equally true for a 501c7 versus 501c3, you need to establish a board and bylaws. That means thinking through your nonprofit board positions and responsibilities, and generating bylaws, then writing them down. These are required to be in writing and accessible to whoever asks.

Incorporate

Next up, file articles of incorporation. Let’s say you’re starting a bicycle club. Once you’ve determined your purpose, and before you start taking dues, you must file articles that you will use to establish your organization as a nonprofit with the government.

Read more: Starting a Bicycle Club in 10 Simple Steps

Apply for an EIN

An employer identification number, or EIN, is critical for doing business, even if that business is nonprofit. You apply for this through the federal government. Note that this is different from a state EIN, and you will likely need both.

Read more: How to Start a Nonprofit in Texas: Key Steps, Essential Forms & FAQ

File with the IRS

Once it’s time to actually file as a 501c7, fill out and submit Form 1024 to the IRS. This legally establishes you as a tax-exempt entity.

Maintain Compliance

In order to keep your tax-exempt status as a 501c7, you have to maintain a certain standard of conduct. That includes respecting the 35-percent non-membership income threshold, keeping good records, filing your state and federal tax returns on time, and being scrupulous about avoiding discrimination.

501c7 Examples

Two real-world examples of 501c7 organizations include:

1. Rolla Alumni of Beta Sigma Psi, an organization that seeks to support the Beta Sigma Psi presence on the Missouri University of Science and Technology campus
2. Congressional Country Club, a golf course and country club in Bethesda, Maryland

Now that you know all there is to know about this type of tax exemption, on to how to start a 501c3!

How to Start a 501c3

Many of the steps for starting a charity are the same as for starting a recreational club. However, there are some notable differences between  501c7 and 501c3.

Define Mission

If you want to meet your nonprofit goals, the first thing you have to do is establish a mission. From this will follow your strategic plan as well as your logic model, which outlines your allocation of resources to meet objectives.

To define your mission, determine whom you want to serve and how you plan to do it. Note that this is different from your vision, which is a picture of what the world will be like once you achieve your goals, but the two are intertwined.

Incorporate

Just as with a 501c7, you must file articles of incorporation in order to legally establish your nonprofit. If you aren’t sure how to do this, it’s best to consult an expert.

Apply for an EIN

Again, the rules for getting an EIN are similar for a 501c7 vs 501c3. Make sure you get both a federal EIN and whatever your state’s version is.

Read more: How to Start a Nonprofit in California: 18 Key Steps & Essential Forms

File with the IRS

To file as a 501c3, you’ll use Form 1023 or, for smaller organizations, 1023-EZ.

Board and Bylaws

Nonprofit charities need boards, clearly laid-out board membership duties, and bylaws as much as recreational clubs do. These will help ensure that, in the future, you always know what to do and have procedure to follow.

Read more: How to Start a Car Club in 8 Steps + Tips to Grow Your Club

Maintain Compliance

To remain compliant, you must file your tax returns annually and avoid any 501c3 violations. These include, but aren’t limited to, excessive lobbying and political activity, excessive personal gain, or making income from the charity.

501c3 Examples

Three 501c3 organizations that you’ve no doubt heard of include:

1. The American Red Cross
2. Habitat for Humanity
3. Make-A-Wish Foundation

How to Know Which One is Right for You

So, how can you tell whether you’re better off as a 501c3 vs 501c7? Here are a few questions to ask yourself:

• Who are you serving — the public or members?
• Will you rely on donations or dues?
• Do you plan to apply for government or foundation grants?
• Do you need tax-deductible status for fundraising purposes?
• Do you want more flexibility with how you use funds?
• What kind of activities will you offer?
• How much administrative complexity are you prepared for?

Once you’ve answered these questions, you’ll be well-positioned to decide which type of entity will serve your needs.

FAQs

Here are some of the most frequently asked questions about deciding between a 501c7 or 501c3 organization.

Can an organization be both 501c7 and 501c3?

No, the 501c7 vs 501c3 are two different designations and you must choose one.

Which is easier to manage and maintain?

Typically, a 501c3 is easier to start, because their goals and operations are direct and straightforward. You may also find it easier to keep going because volunteerism is strong.

How long does it take to get IRS approval for each type?

A 501c7 doesn’t require IRS approval, as it is “self-proclaimed.” A 501c3, on the other hand, requires IRS approval. Typically, this takes about six months. As of this writing, however, applications submitted after June 17, 2024, are on hold.

What if we offer both public services and member benefits?

You can offer both public services and member benefits, but you must lean much more heavily toward one or the other. Choose your main area of focus, then abide by the rules for that designation.

Can a 501c7 accept donations?

Yes, a 501c7 can make 35% of its income in areas other than membership dues.

Can a 501c3 charge membership dues?

Whether a 501c3 can charge membership dues is a matter of some debate and varies by state. In general, while a 501c3 charity can charge dues, it does not necessarily give them voting rights.

What happens if we pick the wrong classification?

If you pick the wrong 501c7 vs 501c3 classification, you can change it. However, you will have to jump through a lot of hoops to prove that your nonprofit now adheres better to the new model than the old.