Club Incorporation and Tax Status

By Martin Brungard, AHA GC Clubs Committee Chair & Foam Blowers of Indiana (FBI) member

Homebrew clubs are often easygoing and free-spirited organizations. Administrative tasks such as incorporating your club or changing its tax status may not be high on your list of club priorities, but these subjects can be important to all clubs.

Learn how club incorporation protects members and how nonprofit tax status reduces taxes.

Club Incorporation

Why do we need to be incorporated? We’re just friends getting together over a beer.

That easygoing mantra is fine when everything is going well. It’s when something goes wrong that the club needs incorporation. Without incorporation, every member or associate of a club could be jointly and individually liable for any club debts or obligations, including lawsuit judgments. That means members with the deepest pockets could end up bearing most of the debt.

Incorporating a club makes it an entity unto itself. Incorporation shields individual members and associates of the club from personal liability associated with the club’s business or activities. Incorporation restricts the exposure of a club to just the club’s corporate assets, thereby protecting the personal assets of individual members. Your club members’ personal assets are not at risk, and club members are not held responsible for the incorporated club’s debts or taxes. Of course, if a member or associate commits a crime or injury, then those individuals can still be personally held responsible under civil or criminal law.

To help protect clubs and their members, the American Homebrewers Association (AHA) has developed a general liability insurance program that clubs can purchase to protect members and other entities from damages. That insurance is inexpensive and useful to clubs.

Directors and officers of an incorporated club do bear some responsibility in helping ensure the club doesn’t commit unethical, illegal, or injurious activities or behavior. A commitment to treating people and property well should help club directors and officers avoid increased liability from their positions.

If clubs are uncomfortable with that possibility, directors and officers (D&O) liability insurance is commercially available. D&O insurance helps protect the personal assets of corporate directors and officers in the event those officers are personally sued for actual or alleged wrongful acts in managing the club. That insurance cost can be many hundreds of dollars per year and could be unaffordable to small clubs, but larger clubs may find it beneficial. The AHA’s club insurance provider offers D&O insurance to homebrewing clubs.

Getting Incorporated

Incorporating a club is not very difficult and can often be accomplished without professional assistance. Clubs are incorporated with the state in which they are located. While the exact requirements for incorporation will vary from state to state, they are likely to include the following.

  1. Have an official club name that is unique from any other corporation in the state.
  2. Have a board of directors.
  3. Have articles of incorporation.
  4. Have bylaws for the club.
  5. Obtain an employer identification number (EIN) from the Internal Revenue Service (IRS).
  6. Identify your registered agent and the corporate address where your club can be contacted.

The forms and information needed for a nonprofit corporation are typically minor. The main thing is to identify the club, its agent (person authorized to represent the club), and the contact information for the club or agent. Articles of incorporation and bylaws may need to be filed at the time of application. Examples of generic club articles of incorporation and bylaws that can be used to ease your document preparation can be obtained here:

Tax Status

One important aspect of incorporation is that the club become its own legal entity capable of making and spending money. Most homebrewing clubs generally match their expenses with their income and are nonprofit entities, and minor income and expenses are likely to imply little to no tax liability anyway. If a club has significantly more income than expenses, then obtaining a tax-exempt status from the IRS may be wise.

Tax-exempt status can take one of several forms; the most appropriate one depends on the club’s focus and activity. Forms of tax-exempt organizations that might be applicable to a homebrew club include the following:

  • 501(c)(3) charitable and educational organizations
  • 501(c)(4) social welfare organizations
  • 501(c)(7) social or recreation organizations

A club would seek 501(c)(3) status if it has significant external income and proceeds are largely applied to charitable or educational activities. This designation is strictly regulated by IRS and is more difficult and costly to obtain than the designations below. Professional assistance is often needed for an organization to apply for and obtain this designation. A criterion for this designation is that at least 85 percent of the organization’s activities must be supporting the stated charitable or educational purpose.

Selecting 501(c)(4) status makes sense when an organization’s activities are mainly political or advocative. While this designation may not be ideal for a homebrew club, it could be useful for an organization that promotes homebrewing or homebrewing law revisions. At least 50 percent of the organization’s activities must be charitable and/or educational. The remaining activities can be legislative, political, social, or recreational. A club can claim this designation without formally applying to the IRS, which avoids significant effort and cost.

Most homebrew clubs are probably best classified as 501(c)(7) social or recreational organizations. This designation limits the gross receipts the club can take in from outside sources. The IRS requires that at least 65 percent of the club’s income come from member dues and fees. Less than 15 percent of the club’s income can come from nonmember sources like fundraisers. If you have only minor external income, this designation can be worth obtaining. Fortunately, a club can claim this designation without formal IRS application, so it is not costly. A club seeking this tax-exempt designation must meet the following criteria:

  1. The organization must be a club composed of individuals.
  2. The club must be organized for pleasure, recreation, and other nonprofit purposes.
  3. Substantially, all the organization’s activities must be for pleasure, recreation, and other non-profit purposes.
  4. No part of the organization’s net earnings may inure to the benefit of a private shareholder.
  5. The organization is prohibited from discriminating on the basis of race, color, or religion.

After verifying that your club meets the definitions for 501(c)(4) or 501(c)(7), all that is necessary to maintain that status is to file an annual tax return with IRS. If the club’s annual proceeds are less than $50,000, IRS tax return Form 990-N is easy to prepare and submit online. An EIN is required on that tax return, so you will need to obtain one from the IRS.

Maintaining Your Corporate Status

Depending upon your state’s requirements, a corporate filing is required either annually or biannually. That filing often requires a fee and information updates for your corporate address and registered agent. If nothing has changed, a payment and affirmation may be all that are required for your state. However, some states may require your nonprofit club to obtain and renew a tax-exempt certificate from the state government. It’s likely that additional income and expenditure submittals will be needed from the club treasurer to support that application and renewal.

The IRS expects the following information when filing your Form 990-N:

  1. Employer identification number (EIN), also known as a taxpayer identification number (TIN)
  2. Tax year
  3. Organization’s legal name and mailing address
  4. Any other names the organization uses
  5. Name and address of a principal officer
  6. Website address if the organization has one
  7. Confirmation that the organization’s annual gross receipts are $50,000 or less
  8. If applicable, a statement that the organization has terminated or is terminating (going out of business)

Form 990-N can only be filed online. The club will need to set up an IRS electronic filing account and retain that login information for future annual filings. The information cited above is entered into the online form, and you affirm that your receipts are less than $50,000. That’s it.

Summary

Given the protections that your individual club members receive and the ability of the club to become a nonprofit entity capable of earning and spending money, getting your club incorporated makes sense! Visit your state’s Secretary of State website to learn their requirements for creating a nonprofit corporation.

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