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To incorporate or not to incorporate - an important question

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The following question was posed to Cal4Wheel:
I see where several clubs are non-profit; is there a reason for this other than taxes and if so, do you know what classification they are using for their non-profit status?

Answer:
Thanks for contacting Cal4Wheel with your question.

There is one overarching factor for clubs that are incorporated: personal assets are protected.

There are other factors and I will try to address them.

First, benefits of incorporation: should your club be sued, the club assets are at risk, provided the club is incorporated. If not, member personal assets are at risk.

Taxes - according to IRS, any money you receive in your checking account is income and must be reported as income. Think about club dues you collect and deposit in your checking account. Okay, your club has a checking account, not you. Well, often those club accounts are established under the signature of a master account holder - your personal account.

Recent IRS rulings are making it more difficult to establish a club account without incorporation paperwork.

If your club decides to do an "adopt-a-trail," Forest Service wants to have a legal, incorporated club as the signature for insurance liability issues.

Now, as to incorporation type, there are three that apply for recreation groups:

  • 501(c)3 - that is a non-profit incorporation. Under that status, you can apply for grants. However, that status also requires some extensive paperwork and reporting requirements.
  • 501(c)4 - that is a not-for-profit incorporation. Technically, still a non-profit. Under this status, you can engage in political activities that a 501(c)3 is restricted from. (c)4's are typically identified as political action committees.
  • 501(c)7 - this is a not-for-profit incorporation for social organizations. It addresses the bank account, tax and insurance liability issues without the excess paperwork and reporting requirements.

I hope this helps. If you have any questions, feel free to ask.

Tags: club formation

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