Thread for a discussion of forming a nonprofit entity. I've broken down the IRS guidance in a series of posts (due to 1000 char limit). Goal here is to identify the steps we need to take.

References:

Nolo Press:

https://www.nolo.com/legal-encyclopedia/form-nonprofit-501c3-corporation-30228.html

IRS:

http://www.irs.gov/Charities-&-Non-Profits/Other-Non-Profits

Specifically, we would be a "social club":

http://www.irs.gov/Charities-&-Non-Profits/Other-Non-Profits/Social-Clubs

With regard to the international scope, it's not clear to me if there would be a separate legal entity in Canada (for example) or if the US-based club would simply have Canadians among its membership. I'm guessing the answers won't be too hard to find.

(Edited 1 Mar. 2014 to reflect further content)

EXEMPT PURPOSES:

According to the IRS the club must be organized for exempt purposes. I've quoted the relevant language here.

"Exempt purposes - Code section 501(c)(7)

A social club must be organized for pleasure, recreation, and other similar purposes. A club will not be recognized as tax exempt if its charter, by laws, or other governing instrument, or any written policy statement provides for discrimination against any person based on race, color, or religion. A club may, however, in good faith limit its membership to members of a particular religion in order to further the teachings or principles of that religion and not to exclude individuals of a particular race or color."

So, no problem with this first step.

EXEMPT PURPOSES AND ORGANIZING DOCUMENTS:

The IRS further states that "Whether an organization's purposes are consistent with exemption under section 501(c)(7) is generally determined based on its organizing documents."

The organizing documents are described as follows:

"Each application for exemption must be accompanied by an exact copy of the organization's organizing document: Articles of incorporation for a corporation, articles of organization for a limited liability company, articles of association or constitution for an association, or trust agreement or declaration of trust for a trust. If the organization does not have an organizing document, it will not qualify for exempt status."

The IRS further mentions that "State law generally determines whether an organization is properly created and establishes the requirements for organizing documents."

This brings up a couple of things that I'll speak to in the next post.

So some things are apparent at this point:

1. The club must be organized in a State. State processes for establishing nonprofit organization vary, and we need to choose one. Furthermore, a quick look at a few states revealed that a PO Box is unacceptable for an address -- they want a physical address, which probably means a member's home or business address for starters.

2. Because we are not generally local to one another, we need to make sure that our board of directors meetings can be held online, via phone, or some similar mechanism. We need to make sure that the state in which we incorporate permits this.

3. Short answer to this is that we probably have to survey a number of states and see what best suits our requirements. The IRS site has convenient links to various States' web pages here:

http://www.irs.gov/Charities-&-Non-Profits/State-Nonprofit-Incorporation-Forms-and-Information

INCORPORATION?

Forming a corporation has advantages in shielding the officers from personal liability. This is something we need to consider... any number of unlikely but not impossible scenarios could arise. An action by any member could potentially cause liability for the club. So, I think incorporating makes a lot of sense.

Assuming we incorporate, then I think it's likely that we would do so in the same State in which we file for nonprofit status.

Bottom line: This is something that requires investigation as well.

Nolo has something worth reading here:

https://www.nolo.com/legal-encyclopedia/five-reasons-incorporate-nonprofit-association-30266.html

I will continue to outline the various steps needed to establish a non-profit, we should have a good list of required actions at the end of this.

FURTHER REQUIREMENTS FOR EXEMPTION:

1. There are limits on income from non-members as well as use of club facilities or services by non-members. These wouldn't appear to be of concern considering the club's purpose and organization.

2. "The club must provide an opportunity for personal contact among members, and membership must be limited." (The latter concerns the fact that the club's services need to be provided to its membership, not the general public.)

3. The club must be supported by membership fees, dues, and assessments.

4. "The organization’s net earnings may not inure to the benefit of any person having a personal and private interest in its activities."

The IRS also talks about how dealing with the public might inure members, e.g. they could stand to benefit from financial transactions with the public, this is not permitted.

FURTHER REQUIREMENTS FOR EXEMPTION: (Cont'd.)

5. "The club's governing instrument may not contain a provision that provides for discrimination against any person on the basis of race, color, or religion."

6. The club may not hold itself out as providing goods and services to the general public.

I spoke with a couple of friends who are attorneys. They said that don't know much about this area of the law, but had some ideas that may be of use.

First, there are organizations that help nonprofits. Often these are nonprofit organizations themselves, and their membership is other nonprofits.

Second, it's possible that various States offer services to nonprofits, to help them get established.

Third, Many law firms provide pro bono ("for the public good") services where they provide legal counseling for free. However, they want to showcase their work (to show what good guys they are) and therefore might focus only on helping charities.

The guys I spoke with suggested that we consult an attorney who specializes in nonprofits to get an idea of which states might work best to our benefit, etc. This, of course, wouldn't be free. I'm willing to throw some cash at that problem, we can cross that bridge when we get to it.

AND FINALLY:

My feeling at this point is that we have plenty of fundamental research to do, then we can begin planning the next phase.

I'll try to look into some of the issues mentioned above, and I'll post as I find out some stuff. If anyone sees something they want to do, please join in!

If you never have money in the bank then you do not want to have anything to do with the IRS or any form of non-profit. Maintaining nonprofit status is both expensive and a hassle.