Mutual Benefit Nonprofits

A mutual benefit nonprofit corporation is formed solely to benefit its own members. Unlike religious or public benefit nonprofits, the purpose of the mutual benefit nonprofit is not to benefit the public at large, but rather a very specific group. The other major difference is that the revenue for the nonprofit is generated via the members. Money comes primarily from member’s fees, dues, and other member-related charges. Mutual benefit corporations usually include homeowner’s associations, trade associations, automobile clubs, social groups, and athletic or sport clubs. A country club is an example of a mutual benefit nonprofit: individual people pay to join the club, and then they must continue to pay a membership fee annually. Memberships can be bought and sold, and therefore any assets or property owned by the country club may be distributed among members in the case that the club should dissolve. 

Why is a mutual benefit corporation considered a nonprofit?

It is not a rule that all nonprofits must benefit the general public, as not all nonprofits are charities.  All revenue that is generated by a mutual benefit nonprofit organization is to go back to the benefit of the members, and the revenue generally comes from the members alone, not from the public. Mutual benefit corporations exist to benefit their members, providing services, insurance, and welfare for their members alone.
 

How is a mutual benefit nonprofit formed?

This process is similar to the formation of a charitable nonprofit (what most people think of when they think of a nonprofit); however the steps of obtaining 501c3 tax exemption and charitable registration do not apply. Those wishing to form a mutual benefit nonprofit will need to follow these steps:
 

  • Find a suitable name that follows the requirements of the state in which the nonprofit is being formed.
  • Organize a team who wants to achieve the same goals to organize and run the nonprofit as board members and directors.
  • Draft bylaws that will govern the way in which the nonprofit is run, and what will happen to assets should the nonprofit dissolve.
  • Appoint a registered agent to accept official documents on behalf of the nonprofit.
  • Incorporate by filing articles of incorporation (or similar documents) with the secretary of state or similar government office in the state in which you are incorporating.
  • Hold the first official meeting to officially adopt bylaws and officially elect directors, the president, secretary, treasurer, and other officers.
  • File any initial or annual reports required by your state.
  • Obtain an EIN number from the IRS for your corporation.
  • Make a corporate resolution and give a member of the board of directors the authority to open a bank account. Take this resolution with you to the bank in order to open the account.
  • Collect dues from the members and fund the mutual benefit corporation.

Taxes

When public benefit or religious nonprofits are formed, there are the additional steps of charity registration as well as applying for 501c3 tax exemption with the IRS. But because the mutual benefit nonprofit is not benefiting the general public, it is not considered a charity and is therefore ineligible for 501c3 tax exemption. Mutual benefit corporations are generally taxed as C-corporations, or a regular for-profit corporation. For this reason, a Mutual benefit corporation will typically only charge its members the bare minimum to fund operations. The option of charging a special assessment or just billing the members monthly according to expenses is a great way to only collect the amount of money that is required to operate the mutual benefit nonprofit. Whatever profit there is at the end of the year must be taxed at high corporate income tax levels. Since the mutual benefit corporation is typically for a specific set of members, it doesn’t make sense to over-collect from members, because anything left over will be taxed via the corporation tax, essentially double-taxing money that was already taxed when the due-paying member earned it in the first place. 

 

About the Author

Drake Forester, Chief Legal Strategiest - Northwest Registered AgentDrake Forester is the chief legal strategist at Northwest Registered Agent, LLC. Throughout his career, Drake has researched many complicated nonprofit compliance issues and provided whitepaper and publications for many leading nonprofit organizations in the United States.