Q&A #7 – Can my 501(c)(6) organization provide funds to help struggling businesses?

Question:  My organization is a 501(c)(6) chamber of commerce, and we have seen many small businesses in our community struggling due to the COVID-19 crisis. We would like to help, and many of our members would like to help as well. Are we allowed to send checks to small businesses that are in distress?

Answer: You have raised an interesting variation on a question that is conceptually similar to the ones we addressed in Q&A #1 and Q&A #6. In your case, the organization is a 501(c)(6) organization and the recipients you want to help are small businesses, so the question raises some unique issues. In short, a 501(c)(6) organization is allowed to provide support to struggling businesses, but there are important restrictions and limitations to be aware of.

First, the tax exemption rules under section 501(c)(6) requires that the organization have a primary focus on improving business conditions as a whole in one or more lines of business, as opposed to providing “particular services” to its members or other individual persons or businesses. The distinction has some gray area and is often difficult to determine with clarity, but providing direct financial support to a struggling business is most certainly a “particular service” (regardless of whether the recipient is a member of your organization).

Thus, you need to be very careful about the amount of your organization’s budget that is going towards this particular program and ones like it. This program (combined with all other programs that constitute “particular services”) cannot be your organization’s “primary” activity or purpose, or else the organization’s 501(c)(6) status could be revoked. I would advise not cutting it too close to the line. Avoid using more than 30% of the organization’s budget toward such programs if at all possible, including the financial assistance program and all other programs that constitute “particular services.”

Second, 501(c)(6) organizations (like 501(c)(3) or 501(c)(4) organizations) are prohibited from allowing their assets to “inure” to the benefit of the persons who control the organization. As a practical matter, this means that the businesses of your Board or Committee members, officers, or high-level employees (as well as the family members of such persons) should be made ineligible to receive these funds.

Lastly, as we described in the case of a 501(c)(3) organization helping financially distressed individuals, it is very important to have policy in place that sets forth the parameters of the program. The policy should, at a minimum, describe the program’s eligibility criteria, supporting documentation that is required from applicants, the amounts that will be provided, and how recipients will be chosen.

Planning Tip – Process and documentation is extremely important for this type of program. Develop a carefully worded policy that includes eligibility, program limitations and distribution rules before accepting applications or publicizing the program. Make sure these written guidelines clearly delineate how much funds will be made available, and how much each recipient can receive. Include clear descriptive criteria in your guidelines for how recipients will be chosen, and provide for the appointment of a disinterested (independent) committee to oversee the program and key program decisions. Finally, always be focused on avoiding conflicts of interest both actual and perceived.   

If you have a question you would like to submit to SE4N, send it to us using the contact form and we will consider answering it in a future post. Please do not send confidential information.