Exemption Requirements for Business Leagues Under Section 501(c)(6)

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Business leagues are organizations or associations that are tax-exempt under Internal Revenue Code (IRC) Section 501(c)(6) if they meet specific requirements. Therefore, to ensure their tax-exempt status, associations wishing to operate as business leagues must be familiar with these requirements to make certain they are in full compliance at all times. Otherwise, they risk violating federal tax laws and losing their tax-exempt status. If you have questions or concerns about how federal tax laws apply to your organization or association, contact Church Law Center at (949) 892-1221 today.

Defining Business Leagues

Business leagues are associations of persons with a common business interest. The purpose of the business league is to promote that common interest and not engage in a regular business of the type that one would normally carry on for profit. For the purposes of this definition, the term “business” is broadly construed to include not only mercantile and trading businesses but also professions.

Examples of business leagues include trade associations and professional associations. The U.S. Department of Commerce defines a trade association as a non-profit, cooperative, voluntary organization designed to assist its members and industry in dealing with mutual business problems. Accordingly, a professional association would perform the same service for members of a particular profession.

Exemption Requirements for Business Leagues

To qualify as a business league, an association must meet various requirements, as outlined in the IRS Exempt Organizations Technical Guide 6 IRS 501(c)(6) Business Leagues.

Association of Persons

An association or business league must consist of a voluntary agreement or covenant between two or more parties to accomplish some purpose. A meaningful extent of membership support is also necessary for an association of persons to exist. One common characteristic of associations is that its members pay dues in exchange for membership.

Common Business Interest

A common business interest generally has the following characteristics:

  • The interest is in business;
  • The interest is in a common or general level of business; and
  • The business is directed toward improving the business conditions of one or more lines of business.

The term “business” is broad, so almost any enterprise or activity conducted for profit is permissible.

Bona Fide Membership

Genuine or bona fide members must comprise the primary membership of the business league. Bona fide members have specific rights and obligations concerning an organization, the right to participate in the organization’s direction, and an obligation to support it financially on a regular basis.

Purpose that Promotes a Common Business Interest

The focus of business leagues must be on the organization’s common business interest rather than on the common business of the association members individually. Therefore, this requirement focuses on the business’s purpose rather than on the business’s activities.

Not Organized for Profit

The language of the organization’s governing documents must establish it as being not organized for profit. As a result of this requirement, a 501(c)(6) organization may not authorize the issuance of shares of stock that carry the right to dividends. However, the organization can have net earnings in the form of an excess of income over expenses.

Not Engaged in Regular Business Conducted for Profit

Although this requirement appears similar to the previous one, it is separate and distinct. This requirement first considers whether the language of the organization’s governing documents indicates a proper purpose for the organization, i.e., a common business interest as described above, or a prohibited purpose, or one that expressly authorizes the organization to conduct a regular business of the kind ordinarily carried on for profit. Assuming that the organization satisfies this condition, the second part of the inquiry considers whether the activities or operations of the organization comply with the statute and regulations. In other words, any business activities typically performed for profit must not be among its primary activities.

Improvement of Business Conditions as Opposed to Performance of Services

The organization’s activities should be directed toward improving the business conditions of one or more lines of business. However, whether the improvement of business conditions results from these activities is immaterial as long as the members reasonably believe they will improve business conditions.

Additionally, the activities must be directed to improve one or more “lines of business.” A “line of business” refers to an entire industry or all components of an industry within a specified geographic area; a “segment” of a line is generally insufficient for the purposes of this requirement.

The organization’s purpose also should be distinguishable from a purpose focused on the performance of specific services for individual persons.

Net Earnings May Not Inure to the Benefit of Any Individual

Although members may generally benefit from the organization’s improvement of business conditions of one or more lines of business, members receiving anything more than these incidental benefits is prohibited. Benefits are more than incidental when they result from an expenditure of organizational funds beyond the scope of benefits that naturally flow from the organization’s performance of its exempt functions.

Nonmember Income and Inurement

Organizations generally also must not receive funds from nonmembers and use those funds to benefit their members. This situation could result in inurement based on an organization’s facts and circumstances. However, if nonmember funds are used for the organization’s exempt purpose and do not inure to the members except through the general improvement of the business conditions of the lines of business, no impermissible inurement has occurred.

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Church Law Center gears its practice to legal matters that affect non-profit organizations, churches, and other religious organizations, including non-profit political activity in California. This focus allows us to concentrate on keeping abreast of the ever-changing laws and policies as they develop over time. We are here to represent your interests throughout every stage of your legal matter. Call us today at (949) 892-1221 or visit us online and see what we can do for you.

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