How to Build a 501(c)(7) Nonprofit From the Ground Up

Securing 501(c)(7) nonprofit status offers various perks. It protects your social or recreational clubs from federal income taxes and strengthens your reputation as a credible exempt organization, to name a few. 

The process of forming a 501(c)(7) isn’t overwhelmingly complex, but the Internal Revenue Service (IRS) includes a suite of exemption requirements that can be a bit tricky to navigate. However, the benefits of forming a 501(c)(7) social club far outweigh the initial investment. 

Below, we’ll walk you through everything you need to know to start a 501(c)(7) nonprofit organization and protect your tax-exemption status. 

What Is a 501(c)(7) Nonprofit?

A 501(c)(7) is a nonprofit social club organized for “pleasure, recreation, and other similar purposes.”¹ Unlike most nonprofits, these exempt organizations don’t rely on fundraising or donations—instead, gaining necessary funding through membership fees and dues from club members.

Examples of 501(c)(7) nonprofits include:

• Sports clubs
• Hobby clubs
• Country clubs
• Dinner clubs
• Homeowners associations
• College fraternities and sororities

The Internal Revenue Service has deemed 501(c)(7) organizations tax-exempt social clubs to unburden these nonprofits offering pleasure, socializing, and recreation opportunities from additional taxes.

What Is Needed to Qualify for 501(c)(7) Status?

The IRS provides a thorough list of requirements² to secure 501(c)(7) status. Here’s what it includes:

• Purpose: Your social club must exist for pleasure or recreational purposes. If not, your organization likely categorizes as another type of nonprofit.
• Contact: Your social club must provide opportunities for members to be social. This includes face-to-face interactions, personal contact, and commingling. These interactions can take place in club facilities or public meeting spaces, as long as there’s an opportunity for members to come together.³
• Limited membership: Your social club must be a membership organization, not a public group. Membership needs to be limited.
• Funding: Your nonprofit organization must require membership fees, assessments, and dues. However, your club can receive up to 35% of its gross receipts from nonmember sources, and this can include investment income.⁴
• Net earnings: Your profits (if there are any) may not benefit anyone with a personal or private interest in the club’s activities.
• Impartiality: Your 501(c)(7) can’t discriminate against any person on the basis of color, race, or religion. However, your club can limit its membership to members of any faith if your purpose is to further the teachings of a particular religion.⁵ 

501(c)(7) vs. 501(c)(3): What’s the Difference?

Both 501(c)(7) and 501(c)(3) organizations share tax-exemption status, but don’t have much else in common. The main differences start with the nonprofit’s purpose. 

For starters, 501(c)(3) organizations focus on charitable causes, while 501(c)(7) nonprofits provide social or recreational opportunities. That means 501(c)(3) organizations primarily fundraise and request donations, but 501(c)(7) nonprofits must rely on membership fees and dues as the main source of funding.

Additionally, 501(c)(7) nonprofits exist to serve members and constituents. For example, a social tennis club doesn’t need to provide services or activities that benefit the greater tennis sport or local recreational opportunities—it just needs to focus on its club members and their experiences. 

If a 501(c)(7) nonprofit starts serving the general public, it risks losing its tax-exemption status. On the other hand, 501(c)(3) charitable organizations must provide services to the general public and not the private benefit of specific groups. 

Neither exempt organization is necessarily better than the other—each just serves a different purpose. And in some situations, recreational and social opportunities might overlap with a charitable purpose. 

If you’re not sure whether your organization’s purpose aligns more with a 501(c)(3) or 501(c)(7) nonprofit status, consider your source of funding. If you plan on fundraising for financial support, you’ll most likely need to form a 501(c)(3) organization. However, if fundraising will only play a small part in your financial strategy, and you plan to rely on membership dues as your primary funding source, a 501(c)(7) organization will likely be a better fit.

Classification of Tax-Exempt Organizations

Organizations with 501(c) status serve different purposes. Some provide recreational opportunities for the local community, while others focus on charitable giving to foreign countries. Here’s a quick look at other popular nonprofit classifications:⁶

• 501(c)(3): Charitable organizations
• 501(c)(4): Social welfare organizations
• 501(c)(6): Business leagues
• 501(c)(8): Fraternal societies
• 501(c)(12): Life insurance associations

Benefits of Starting a 501(c)(7)

Not sure if you want to pursue 501(c)(7) nonprofit status for your organization? Consider the following benefits:

• Tax exemption: Forming a 501(c)(7) nonprofit grants you exemption from federal taxes, which means you can use that additional funding to advance your nonprofitable purposes.
• Structure: Establishing your organization on the sound foundation of a written policy, strengthened legitimacy, and established structure prepares it for sustained growth and longevity.
• Credibility: Obtaining a legally recognized status as a nonprofit can play a huge part in convincing potential donors and investors to contribute to your organization.
• Service: Achieving 501(c)(7) nonprofit status allows you to serve more members and strengthen your impact.

Tax exemption is reason enough to form a 501(c) organization, but there are a few considerations to make before deciding to proceed with a 501(c)(7) social club. 

For starters, donations to your organization won’t be tax deductible (as with 501(c)(3) charitable organizations). This fact alone can deter potential donors from contributing to your nonprofit.

As an established nonprofit, you’ll also be responsible for more financial and administrative work. You’ll need a set of nonprofit bylaws, and it’ll be your responsibility to update these documents regularly. Additionally, you’ll need to fulfill the filing requirements and monitor activity to ensure you don’t lose your tax-exemption status.

How to Start a 501(c)(7) Nonprofit

• Form a board: Build a nonprofit board of directors to govern your organization and provide guidance on its direction.
• Create bylaws: Create a written set of nonprofit bylaws to explain how your organization operates. The IRS will review your bylaws to ensure the nonprofitable purposes and procedures of your organization comply with 501(c)(7) requirements. 
• File paperwork: Submit IRS Form 1024 to apply for tax-exemption status. You’ll need to complete this document electronically through Pay.gov.⁷
• Submit returns: File annual returns documenting your income and expenses. The IRS still requires you to do so even if your nonprofit is exempt from federal income tax.

Remember, while membership fees and dues will make up most of your 501(c)(7)’s funding, you still have the flexibility to find other funding sources. For example, you could launch a crowdfunding campaign or host a local event. However, these other sources of nonmember income will likely be subject to taxes.

Drive Your Nonprofit Forward With Classy

Classy provides all the tools and features nonprofits need to grow their impact—whether optimizing your donation site or elevating your next event using a virtual fundraising event platform.

With Classy’s end-to-end giving platform, nonprofit organizations can mobilize with tools like:

• Crowdfunding campaigns
• Flexible payments and secure nonprofit credit card processing
• Classy Live event platform
• Online auction software and mobile bidding
• Online peer-to-peer fundraising

Not sure if Classy is right for your nonprofit? Request a demo, and a member of our team will answer all your questions and walk you through everything you need to know. 

Article Sources

1. “Exempt Purposes – Code Section 501(c)(7),” Requirements for Exemption, IRS, date accessed, https://www.irs.gov/charities-non-profits/other-non-profits/exempt-purposes-code-section-501c7.
2. “Social Clubs,” Exempt Organization Types, IRS, date accessed, https://www.irs.gov/charities-non-profits/other-non-profits/social-clubs.
3. “Social Clubs – Requirements for Exemption – Personal Contact Required,” Requirements for Exemption, IRS, date accessed, https://www.irs.gov/charities-non-profits/other-non-profits/social-clubs-requirements-for-exemption-personal-contact-required.
4. “Social Clubs,” Exempt Organization Types, IRS, date accessed, https://www.irs.gov/charities-non-profits/other-non-profits/social-clubs.
5. “Exempt Purposes – Code section 501(c)(7),” Requirements for Exemption, IRS, date accessed, https://www.irs.gov/charities-non-profits/other-non-profits/exempt-purposes-code-section-501c7.
6. “Social Welfare Organizations,” Charities and Nonprofits, IRS, last modified August, 9, 2016, https://www.irs.gov/charities-non-profits/other-non-profits/social-welfare-organizations.
7. “About Form 1024,” Tax-Exempt Application Process, IRS, date accessed, https://www.irs.gov/forms-pubs/about-form-1024.