Thanks to everyone who attended our fourth Leadership Seminar webinar, Nonprofit 101: Level up to 501(c)(6) Status, hosted by Rent Responsibly and sponsored by C2G Advisors, a Nashville, Tennessee-based advisory firm in the short-term rental industry.
In this webinar, panelists Debi Hertert, host and founder of Oregon-based Host2Host; Dana Lubner, head of leadership development at Rent Responsibly; and Bruce Hoban, co-founder of Vacation Rental Owners and Neighbors of Palm Springs, talked about the advantages of a short-term rental association or alliance incorporating as a 501(c)(6) and shared 10 steps on how to successfully navigate the complicated process.
Here are some key takeaways from the event:
“We can’t volunteer our way out of this.”
Toby Babich, mayor of Blue River, Colorado, and president of Summit Alliance of Vacation Rental Managers
As the short-term rental industry increasingly professionalizes, more STR operator associations and alliances have incorporated or are considering incorporating as a 501(c)(6), a nonprofit status designed specifically for trade associations like a group of short-term rental operators. It provides nonprofit status but is not a charitable organization.
Benefits of operating a 501(c)(6)
Establishing a 501(c)(6) nonprofit organization can help clear the path to sustainability for your short-term rental association’s educational and advocacy efforts.
“The notion of credibility is very important. We’re able to say we’re nonprofit, and people don’t automatically jump to the conclusion of whether it’s charitable or non-charitable, but you get a benefit from the phrase.”
Debi Hertert, founder of Host2Host
Other benefits:
- It allows your alliance or trade association to enjoy tax-exempt status with the IRS and the state taxing authority.
- Having 501(c)(6) status ensures that whoever is on your board has protection against personal liability in the event that your organization is sued.
- A relatively small organization can gain credibility from organizing as a nonprofit.
- Nonprofit status puts you on the books and helps support your organization’s perpetual existence.
Before filing as a nonprofit, try to consolidate overlapping advocacy groups and get them on board, clarify your business plan, and determine who is responsible for filing and paying filing fees.
“The best person that you might choose to do this paperwork is someone who is organized and hopefully someone who has some experience, too, and someone who has a lot of patience, because this takes time.”
Debi Hertert, founder of Host2Host
The process to become a 501(c)(6) can take anywhere from two months to 12 months, depending on several factors.
501(c)(6) misconceptions
Tax-exempt means you don’t pay any federal or state taxes; it doesn’t mean that people who make donations to your organization get a tax write-off.
As a nonprofit, you are not a charity; therefore, donations to your organization are not tax deductible on the basis of a charitable donation. However, most operators could write off a donation as part of their costs in operating a short-term rental.
Forming an LLC is a cheaper version of a nonprofit corporation. The downside is you don’t have all the protections you have as a 501(c)(6) corporation.
A 501(c)(6) is not a PAC (political action committee). A PAC is a unique committee that is set up for fundraising and spending money to defeat a candidate or a ballot initiative in states where you can gather signatures and put something on a ballot. Your association may want to form a PAC to fundraise for political campaigns to pay for things such as yard signs against a measure to ban vacation rentals, but that committee would be an entity separate from your nonprofit organization.
Steps to incorporating as a nonprofit trade association
Step 1: Register a name
Choose a name that is easy to remember, explains the purpose of your organization, and sounds appealing. Check with your state Secretary of State to make sure the name is not already taken.
Access: The Ultimate Guide to Building a Short-Term Rental Alliance
Step 2: Appoint or elect a Board of Directors
The Board of Directors is ultimately responsible for any actions the corporation takes. They vote on decisions such as whether the corporation is going to spend money on something or make a public statement on an issue.
When determining the number of directors you want on your board, an odd number is usually an advantage in voting.
In order to vote on anything, the board needs a quorum, which means that more than 50% of the board members are present at a formal meeting. Therefore, having a larger number of board members can provide an advantage in achieving a quorum on a regular basis.
Nonprofit corporations often have an Executive Committee that is a subset of the Board of Directors.
“In our case, we have an 11-person board in Palm Springs., and we have a three-person Executive Committee, the President, the Secretary, and the Vice President, we are able to meet far more often and far more quickly. And there’s certain things we’re allowed to do and not to do, but we can formulate the ideas, have all the discussions, and then present them back to the board. So that we’re not literally boring, everybody in a board meeting, trying to figure out what it is we want people to focus on.”
Bruce Hoban, co-founder of Vacation Rental Owners and Neighbors of Palm Springs
Step 3: File your article of incorporation
An article of incorporation states the organization’s name and purpose and is filed with the Secretary of State’s Office.
It includes the name and address of your registered agent, the type of corporation such as a 501(c)(6), areas of operation for the corporation, names of initial directors and their addresses, duration of the corporation, and the name and address of the incorporator.
Step 4: Obtain your Employer Identification Number
Your EIN is a unique nine-digit number assigned by the IRS. You will use your EIN to open a bank account, apply for 501(c)(6) status and submit a 990 tax return to the IRS. You can apply for your EIN on the IRS website in about 15 minutes.
Step 5: Draft bylaws
Bylaws are the rules and regulations by which you are going to run yourselves. The bylaws lay out how many people you have on your board, how often the board and/or members will meet, the frequency of elections, and who is authorized to spend money without board review.
Step 6: Open a nonprofit bank account
Before soliciting funds for your organization, you’ll want to open a nonprofit bank account.
Banks will require a copy of the following documents: articles of incorporation, bylaws, and your EIN.
Step 7: Consider Directors and Officers Insurance (D&O)
D&O helps protect your organization’s assets if the organization or any of its members are sued, but it can be expensive, particularly for a new corporation that has no history.
If money’s tight, conduct a risk assessment on your board’s chances of getting sued.
“In the more contentious cities, where there’s a lot of stuff going on between homeowners in the city and anti-vacation rental people, you can elect and pay for directors and officers insurance. So, for example, if you got involved in a lawsuit, and the court said you have to pay $20,000, it wouldn’t bankrupt your association; it would come out of the insurance fund.”
Bruce Hoban, co-founder of Vacation Rental Owners and Neighbors of Palm Springs
Step 8: Draft policies on conflicts of interest, privacy, discrimination, and governance
These policies are an instruction manual for how your organization navigates potential conflicts of interest (COI) involving organizational decisions that impact the organization’s directors, officers, and key employees in their individual capacities.
For instance, will you allow a married couple or two partners who own a large property management company to each have a board seat?
A COI policy should ban group discussion of individual nightly rates.
Step 9: Federal recognition
Upgrade your organization from a state corporation to a federally registered 501(c)(6) nonprofit by filing a Form 1024, a 22-page form that asks for detailed information on your organization and activities, and requires a financial history and financial projections for the next three years. The filing fee is $600.
Your articles of incorporation and bylaws must be approved before filing.
Step 10: Apply for state tax exemption
As a nonprofit, you don’t have to pay taxes, but you must apply with the IRS and the state to get this status. Familiarize yourself with your state’s requirements for recognizing your nonprofit’s tax-exempt status, as it can vary by state.
How much to budget and how long it takes to get 501(c)(6) status
Overall, an alliance or association looking to incorporate should budget for filing, D&O insurance, and other costs specific to your state. The entire process typically takes between two months and one year, depending on whether there are backlogs and how quickly your association makes decisions.
Filing your nonprofit’s taxes
Filing your nonprofit’s state and federal tax forms are easy. File a 990 EZ form, which is literally a postcard if you make less than $50,000 in revenue a year.
If you make $50,000 or more, you file a Form 990, which is a slightly longer postcard that you can fill out online. It lists what your revenue was, and you list your expenses and how much was left in the bank. Depending on the state, your federal filing will either go to the state or you will have to do your own state filing. Tax filings are based on your fiscal year, not your calendar year.
Why it’s worthwhile to become a membership organization
Hosts are not Airbnb, and forming an individual entity registered with the IRS and state taxing authority reinforces that fact and represents hosts’ unique voice, interests, and priorities.
“We really needed to be seen as an autonomous entity, and we needed to pull together in order to do that. We were able to get everybody together and down to town hall and say, here we are; you don’t need to talk to Airbnb; you need to talk to us, and town council was going, where have you been? That was a lightbulb moment [on why forming a nonprofit is worthwhile].“
Debi Hertert, founder of Host2Host
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