Most of us don’t go into sports academy ownership with dreams of making millions – our main goal is to help kids. However, most sports academies are still set up as for-profits for legal business and tax purposes.
That’s because choosing between operating as a nonprofit or for-profit is actually more of an accounting question than a question of your mission. It doesn’t affect much about how you operate on a daily basis, but it will affect how you collect money and pay taxes.
DNA Sports Center is a for-profit LLC, but we were also once home to a select baseball organization that I set up as a nonprofit. Having run both types of organizations, I can get you started with a few basics if you’re considering filing for nonprofit status.
Collecting from Sponsors vs. Relying on Payments from Players or Customers
You might think the biggest benefit of being classified as a nonprofit would be tax relief, but there’s a more important benefit for us sports academies: the ability to collect sponsorship money more easily. Donations to nonprofits are tax-exempt for sponsors.
In my experience, the sports organizations that benefit the most from nonprofit status are those whose primary services are teams, such as a rec soccer leagues or volleyball clubs. These types of organizations often rely heavily on sponsorships to keep fees manageable for their players and families, and sponsorships for nonprofit teams tend to be generally attractive to local businesses.
Remember, a for-profit sports academy or sports complex can also collect money from sponsorships, but they won’t be tax-exempt for donors, so you have to make them especially compelling in other ways.
If sponsorships feature heavily as an income source in your business plan, you should consult with your accountant about filing for nonprofit status.
Tax Exemption = Loads of Paperwork
Yes, you do get tax benefits if you’re legally classified as a nonprofit organization. Typically, you’ll save on some sales tax and some income tax. However, the benefits and regulations vary a lot by state, and sports organizations will have to file plenty of paperwork to get classified as a nonprofit.
First, you have to incorporate as a nonprofit in your state, then you’ll have to apply for federal 501(c)(3) status.
This consulting company for nonprofits summed it up the application process pretty well:
Instead of an audit of a tax return, the 501(c)(3) application process is more like an audit of proposed (and/or previous) activity. It is a thorough examination of the organization’s governing structure, purpose and planned programs. The IRS is looking to make sure that the organization is formed for exclusively 501(c)(3) purposes and that its programs are designed to fulfill these stated purposes. In addition, the IRS is looking closely for conflicts-of-interest and the potential for benefit to insiders, both possible grounds for denial.
The paperwork involved is not fun. The applications can get to be up to 50 pages long (I remember the paperwork-induced headaches well).
However, the upfront work can certainly pay off over time in some cases. Your accountant can give you a better idea of whether you’ll benefit enough from the tax breaks to justify the initial filing.
I mentioned, nonprofit regulations and benefits vary by state, and before you make any decisions about which structure to choose, you need to consult with your locally-based accountant and lawyer.
To qualify for nonprofit status, your organization has to be devoted primarily to the good of the kids you’re serving, and not devoted primarily to personally benefiting you, or any other private interest, individual or shareholder.
Consider your exit strategy; most owners dream of selling all their assets at some point, perhaps to help fund their retirement. Nonprofit directors won’t get that type of exit.
You can also do what I did and create a nonprofit for the team or league component of your academy and keep the rest of the business for-profit. (Considering the baseball organization that I helped start and get 501(c)(3) status for parted ways with DNA Sports Center after a few seasons, I’m not sure I’d go through the paperwork headaches again.)
Do you have any insights into the benefits of running your sports academy as a nonprofit? Please contact me or leave a comment below.