CORPORATE TRANSACTIONS & COMPLIANCE BLOG

Membership Organization Charitable Registrations and Exemptions

By: Ron Barrett, COGENCY GLOBAL INC. on Fri, Sep 14, 2018

A membership organization is a nonprofit that has members.Simply put, a membership organization is a nonprofit that has members.

“Membership” isn’t defined in most states, but the states that do define it commonly refer to it as the relationship of a person to an organization which entitles them to the privileges, professional standing, honors or other direct benefit of the organization, in addition to the right to vote, elect officers and hold office in the organization.

In Illinois, Kansas, Mississippi, Missouri and New York, membership organizations can be fraternal, patriotic, social, educational, alumni organizations and historical societies. Other states are more exclusive in this interpretation. In Alabama, only civic leagues/organizations are considered membership organizations. Oklahoma limits this designation to fraternal organizations.

A number of states provide for exemption from charitable registration, if solicitation is done only by the organization’s members within its membership. (Note that in this case, the term “membership” usually does not include anyone granted a membership upon making a contribution as a result of a solicitation.)

Membership organization exemptions are currently available in about 22 states but there are two broad exceptions that can exclude membership organizations from exemption consideration.

Professional Fundraising Exception

In some states (e.g. Georgia, Maine, Maryland, Oklahoma, Rhode Island, South Carolina, Virginia and West Virginia), nonprofits that use the services of professional fundraisers will not qualify for a membership organization exemption. However, nonprofits that conduct fundraising activities via efforts by their members, employees or volunteers do remain exempt in these states.

Membership Solicitation Exception

Members only.Most states offer a membership organization an exemption from registration so long as its charitable solicitations are limited to the nonprofit organization’s members. In some cases, this only includes voting members. In a few states, solicitation can extend to families of members.

Organizations must be aware of what constitutes a “membership organization” and who qualifies as a “member”, as the definition for these terms varies slightly in every state’s statute. Some states define “member” differently, according to the type of organization. For example, an educational institution’s members usually include students, parents of students, alumni, trustees and, sometimes, friends of the institution. This is different than a membership organization where members or voting members in a business or trade association make up the membership class.

Since the charitable registration exemption for membership organizations is largely based on restricting solicitation to members, any solicitation made outside of this defined group (e.g. corporations, government entities, nonprofit foundations) makes the nonprofit ineligible for exemption and thus expected to register to solicit. 

Some states have a dollar threshold exemption. In Connecticut, any organization that receives less than $50,000 in annual, worldwide contributions is exempt from registration, providing no one is compensated to exclusively conduct solicitations. (Salaried staff and independent contractors can solicit if their primary function is not related to fundraising activities.) An exemption application is required if an organization qualifies for a monetary threshold exemption in Connecticut, which is true in several other states.

When determining dollar threshold exemptions, member dues and similar payments are often excluded from most state definitions of “contribution” if membership is not conferred in consideration of making a contribution in response to a solicitation. Thus, if the majority of a membership organization’s revenue is from membership dues, fees or similar payments, then the organization can solicit “contributions” from non-members nationwide up to the applicable state’s dollar threshold exemption (for example, $50,000 in Connecticut).

States Where Registration is Required

Most states have exceptions to the charitable registration exemption for membership organizations, but there are 17 states that frequently require charitable registration:

  • Alaska*
  • Arkansas
  • California
  • Colorado*
  • Connecticut
  • Hawaii
  • Massachusetts*
  • Nevada
  • New Hampshire
  • New Jersey*
  • New Mexico
  • North Carolina*
  • North Dakota
  • Oregon
  • Pennsylvania*
  • Tennessee*
  • Washington

*Denotes states where a monetary threshold exemption is available.

Oregon is unique in that it exempts mutual benefit corporations incorporated or qualified in the state from registration. These "mutual benefit corporations" include all other nonprofit corporations which are not classified as public benefit or religious corporations, and are typically organized for the benefit of the organization's membership (e.g. social clubs, business leagues and veterans groups).

Download our Membership Organization state-by-state resource guide.

Exemption Applications and Letters

There are 8 states that require membership organizations to file an exemption application:

  • Alabama
  • District of Columbia (D.C.)
  • Michigan
  • Minnesota
  • Mississippi
  • South Carolina (annually)
  • Utah
  • Virginia

Instead of an exemption application, Maryland and Missouri require organizations to submit an exemption letter.

Note: Missouri will also exempt organizations that the IRS has recognized as tax exempt under Internal Revenue Code Sections 501(c)(3), 501(c)(7), or 501(c)(8), even if the organization does not meet the requirements for a membership organization exemption.

Optional Exemption Application or Letter

In some states, membership organizations are not required to submit documentation for solicitation registration exemptions, but it may benefit an organization to have record of having ‘self-declared’ as exempt.

New York and Ohio offer optional exemption applications, 11 states allow membership organizations to submit an optional exemption letter:

  • Florida
  • Georgia
  • Illinois
  • Kansas*
  • Kentucky*
  • Louisiana*
  • Maine
  • Oklahoma
  • Rhode Island
  • West Virginia
  • Wisconsin

*While these states allow membership organizations to submit letters, it is not recommended as the state may not respond because the letter is seen as unnecessary.

Note: Under Louisiana law, there is no explicit exemption for membership organizations. Only charitable organizations that use a professional solicitor are required to register.

States Where Registration is Not Required

There are 9 states that do not have a charitable registration statute requiring registration by charitable nonprofits:

  • Delaware
  • Idaho
  • Indiana
  • Iowa
  • Montana
  • Nebraska
  • South Dakota
  • Vermont
  • Wyoming

Nonprofit organizations in Arizona and Texas are not required to register unless they are veteran’s organizations (both AZ and TX), law enforcement (TX) or public safety organizations (TX).

Download our state-by-state registration and exemption resource guide for more information.

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Topics: Nonprofit Registration and Compliance