I recently assisted a client with completing a Form 1023 to apply for tax exemption with the IRS for a newly form nonprofit entity. As part of this process, questions came up about whether the organization was a social welfare entity or more like a social club. The main difference between the two is that a social welfare organization (501c4) performs some type of public or community benefit, while a social club (501c7) is organized for recreation. A social welfare organization serves the general public, while a social club’s membership must be limited.
Examples of social welfare organizations include a community association that works to improve public housing and residential parking, or an organization that tries to encourage industrial development and relieve unemployment in a certain area (both serving the public). Examples of social clubs include a gun club, a college sorority, or an amateur sports club (all serving a limited membership).
There are certain rules to keep in mind with both types of tax exempt entities. A social welfare organization is not permitted to restrict the use of its facilities to a private group as they must serve the general public. A social club must be mainly supported by membership dues income and must provide for an opportunity for personal contact among its members.
So both organizations are “social” in nature, the difference is whether the socialization is with the public or with a limited group.
By Colette Kamps, CPA