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. Last week we explored some of the respective benefits of the choice to be a non-profit or for-profit club (if you missed the first part of the article, please email sgans@princelobel.com). This week we address the legal steps involved in the conversion from a non-profit to a for-profit entity.
Conversion to For-Profit: Legal Steps
Converting from a non-profit club to a for-profit club involves some complexity. A new for-profit entity must be formed, which will purchase the assets of the non-profit. Given its public purpose,
the non-profit must contribute the proceeds of the transaction to the organizational mission. As respective state Attorney Generals have oversight over non-profits, the Attorney General must sign-off on the transaction. Such official approval includes confirming:
a) that the non-profit’s purpose/mission is being furthered by the transaction;
b) that the transaction is in the public interest;
c) that there are no conflicts of interest; and
d) that the assets are being purchased at fair market value.
Technically, while it is clear that the for-profit will purchase the assets of the non-profit, there are two choices about what to do with the non-profit (seller) entity. The first option involves the non-profit dissolving as an entity, and gifting the sale proceeds to another existing non-profit with a substantially similar mission. The other option involves the continued existence of the non-profit entity and conversion of it from an operational entity to a charitable foundation, to which the sale proceeds are contributed.
The non-profit and the for-profit have to enter into an Asset Purchase Agreement in which the parties agree on the sale of the non-profit’s assets to the new for-profit. In terms of a purchase price, the non-profit must secure a third party appraisal in order to determine the value of the assets. The for-profit also agrees to assume any debt on the assets. The purchase price is the difference between the value of the assets and the amount of the debt assumed in the transaction. Depending upon the jurisdiction, anywhere from a majority to two-thirds of the non-profit’s
disinterested board members must approve the transaction.
While the law and related process may vary somewhat from state to state, the non-profit to for-profit conversion process will likely require the following steps:
- Notice of the proposed transaction published in a general circulation newspaper in the area
- a Public Hearing to receive feedback from the public and to consider the merits of the proposed transaction
- Submission to a presiding court and related court approval of the non-profit conversion
In terms of documentation, the petition should contain the following documents:
- a Legal Memo which addresses how the Attorney General’s criteria will be met, including why the proposed transaction is in the public interest and that the assets are being purchased at fair market value
- a copy of the Asset Purchase Agreement
- Financial Statements and copies of Tax Returns (three years’ worth)
- Articles of Organization and By-Laws of each entity
- A copy of the Appraisal
- Minutes from Board of Directors meetings
- Officer Certification of no conflicts of interest
Running the Club Post Transaction
Assuming each of the steps are properly taken and approval for a conversion to a for-profit entity is received (and assuming that you have chosen to retain the non-profit and have converted it to a charitable foundation), your organization should operate with two entities in the following manner:
1. For-Profit Operational Entity: which operates the club and manages each of the teams, and the day-to-day activities of the club.
2. Non-Profit Charitable Foundation: which takes the transaction sales proceeds, charitable donations and fundraising dollars to support the foundation’s mission.
A logical purpose is to provide opportunity for and to further the participation of youths in sports through the provision of scholarships and tuition defrayal. The foundation must have a separate and independent Board of Directors from the for-profit entity.
Conclusion
The choice of whether your club should be a non-profit or for-profit entity depends on your unique facts and circumstances and the underlying purposes and goals of the club. When and if a club elects to convert from a non-profit to a for-profit organization, club leaders should carefully follow the necessary steps involved in such conversion in order to successfully achieve the transaction and to avoid the traps for the unwary.
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 sgans@princelobel.com, or Serge Bechade at 617 456 8016 or sbechade@princelobel.com.