One of the most talked about questions in club soccer today is whether a club should consider converting from a non-profit to a for-profit entity. There is no single answer for all clubs, and there are good arguments for each form of entity. This article will consider some of those arguments, and will explore the legal considerations involved in converting from a non-profit organization to a for-profit entity.
Traditionally, most American youth soccer clubs have been formed as non-profit organizations. The surplus revenues of a non-profit organization are used to further its mission, and are not distributed to its directors or other individuals as profit. I was once involved in a transaction in which the founder and DOC of a non-profit club said that he wanted to sell his “stock”. There are in fact no individual stockholders of non-profits. Rather, as a non-profit club has a community or public purpose, the “owners” are the public. In contrast, for-profit companies are allowed to distribute the profits of the entity to its owners. There has been a recent trend of several non-profit clubs converting to for-profit status, and new clubs often form as for-profit companies.
Operating as a non-profit can allow a club to receive favorable tax treatment both on a state and federal level. To the extent that the club qualifies federally as a 501(c)(3) organization, donations to the club may be tax-deductible by the donors. In addition, the non-profit does not pay income tax on the receipt of the donations or on its net income. The club may also be able to receive tax
benefits in connection with any real estate owned by the club. Donations to a for-profit club are not tax-deductible by the donors, the club will pay income tax on the net income, and property taxes must be paid on any club-owned real estate.
In deciding which legal form fits best for your club, there are various pros and cons to consider, and the ultimate choice may come down to the purpose/mission of your organization.
Here are some of the pros regarding the non-profit form of entity:
- Tax Deductibility: Donations to the non-profit are usually tax-deductible to donors (subject to limitations), thereby aiding the fundraising efforts of the club. If the focus and mission of the club is to support underserved youth, for instance, the non-profit form would presumptively be preferable for the enhanced ability to attract donors.
- Taxation: The non-profit does not pay income tax on its net income.
- Grants: If an aim of the club is to apply for and receive grants from foundations to support the club’s mission, becoming a non-profit would be preferable, as foundations will usually only make grants to non-profits.
- Corporate Sponsorships: The likelihood of securing corporate sponsorships from business corporations is enhanced if you are a non-profit, as companies like to be recognized as supporting non-profits and charities (As an aside, I do know a leading for-profit club which does in fact have a substantial number of corporate sponsors, reflecting in that case its domination in its particular market).
- Lower Fees: To the extent that the non-profit status aids the club in successfully securing cash donations, grants and corporate sponsorships, such inflows of cash may allow the club to offer competitively lower tuition fees, thereby satisfying parents and offering the club an edge vis-à-vis other clubs.
- Field Restrictions: It is not uncommon for private schools or municipalities to restrict use of fields to and/or to discount rates for non-profit youth clubs. In this scenario, existence as a non-profit club can favorably address the essential and competitive field sourcing issue.
- Goodwill: Faced with pay-to-play tuition, travel and equipment costs, many parents question club fees, and often ask questions such as “How much profit does the
club make?” In the midst of such skepticism, club officials who interface with parents are in a more favorable position from a goodwill perspective when they can say that the club is a non-profit, as opposed to a for-profit entity.
Here are some of the benefits in forming a for-profit entity:
- Profit Distribution: As a for-profit entity, the club may distribute any surplus of revenues over expenses to the equity owners.
- Conflict of Interest Avoidance: Operating in the public good, non-profit entities must have strict standards governing whether officers and directors may gain financial benefit in connection with their club activities. For-profit companies have fewer of these types of restrictions.
- Capital Raising: Non-profit organizations have to rely solely on operating revenues, donations (or grants) and bank loans to fund their operations and growth; they are unable to access capital investment. For-Profit entities can raise capital funds from founders and investors, potentially providing the club with stability and growth opportunities.
- Compensation: The compensation for executives in a non-profit must be limited to what may be defined as “reasonable compensation” for the particular role at issue by the IRS and other governing agencies, irrespective of how financially successful the organization may be. For-profit entities operate under no similar restrictions.
- Exit Scenario: In the event that the assets of the for-profit entity are sold in a change of control transaction, the founders and equity owners can share in those proceeds relative to their ownership stake in the organization. The proceeds of a transaction involving a non-profit are restricted and must go to the public purpose of the organization.
- Transaction Simplification: In such a change of control transaction involving a non-profit organization, such transaction may be subject to the review and approval of the state Attorney General’s office (which regulates non-profit organizations). Such review is generally not necessary when a for-profit club sells or transfers to or merges its assets with another entity.
The legal steps involved in the conversion from a non-profit to a for-profit organization.
If you have any questions about the information presented here, or would like to learn more about how Prince Lobel can address any of your club legal related concerns, please contact Steve Gans, the author of this Alert at 617 456 8014 or firstname.lastname@example.org, or Serge Bechade at 617 456 8016 or email@example.com.