In general terms, an association is simply a group of people banded together with a common purpose, often for the benefit of a wide range of members. However, to qualify under section 501 (a) of the code, the association has to have a written record, including, articles of association, stating its formation. As mentioned in the preamble to this article, however, it is possible to form an “association” without meeting this requirement, and the resulting association will not be considered an association under United States law. A few states, however, specifically allow a business or a member of a business to be an association. In most other states, a business can only become an association if it has been registered under its state’s statute. However, generally, most associations fall into one of three categories: proprietary, public or cooperative.
Proprietary associations are limited in the extent of their membership. Limited liability companies (LLCs) are probably the most common example. Generally, they have limited liability and operate by having no more than two board members. They are also required to meet the state’s requirements for registration, to pay a tax on their assets, and to publicly issue its charters and documents. Private equity associations are also examples of proprietary associations, and can enjoy tax advantages, particularly if they elect to pass their operating funds to members instead of to the government.
Public associations are governed by different sections of law. In general, public associations have to meet a wide range of legal requirements before they can file a complete annual report with the IRS. The most important requirement, of course, is that the association have a website and that it publish its annual report to the IRS. The website and the published report are usually used to invite contributions from members, but the association still has to meet all other state and federal requirements.
Forming an independent non-profit association requires much more work than forming an educational or trade organization. As the process evolves over time, the IRS will consider many aspects of the Association’s activities and determine if the organization is making an honest effort at minimizing its tax liabilities. Many organizations fail to become compliant because they are attempting to do too much, while not being able to do too little. In the end, it may be better to pay more and get more, rather than to pay less and get nothing. The IRS is especially concerned about astute businesses that seem to be getting by on the strength of their good name, but whose true intentions can later come to light.
There are several ways that the IRS keeps tabs on both the Association’s activities and its finances. One way is through AMCs. An AMC is an Assumed Name Condition, which is a tax identification number that can serve as a verification tool. This number identifies the business for the purposes of tax reporting and auditing. Generally, the majority of non-profit associations file an AMC with the IRS on an annual basis, but some also report annually when an increase in income or revenue is reported. Other types of reports can be filed on an additional yearly basis by certain associations, including those that qualify for SSA benefits, as well as certain professional organizations and self-funded associations.
There are two types of AMCs available to associations; professional or self-employed AMCs, as well as those filed solely for charitable purposes. Professional AMCs generally charge a fee of approximately $500, while self-employed AMCs are not tax-exempt. Certain professional association fees, however, such as those collected from vendors and membership organizations, are tax-exempt. It is very important to consult with a certified public accountant or CPA before joining any community service association, as this is an area where one must be extremely careful in order to avoid potential problems with tax-exempt status.