Youth sport clubs are generally structured as nonprofit organizations, which simply means that there is no owner or any shareholders that benefit from excess revenues (profits).
Members of boards of directors of youth sport organizations sometimes have little background in tax law or a real understanding of what the terms profit and nonprofit mean. In this article I will cover the basics but I am not offering legal or tax advice. Questions about taxes or organizational structures should be directed to professionals in these areas.
Profit is money that’s left over after all expenses have been paid. It’s often confused with revenue which is the total amount of money that flows into a business. Expenses for operating the business are paid from revenue. Whatever is left after all expenses are paid is called profit. This concept applies to both profit and nonprofit organizations, the only difference is that in nonprofit organizations profit is called surplus revenue.
In for-profit organizations the profit belongs to the owner of the business or its shareholders. In nonprofit organizations the surplus revenue (profit) belongs to the organization itself and must be used for the furtherance of the organization’s mission.
Many times the term nonprofit is understood as meaning the organization is not allowed to make money. This is incorrect; any business that is not trying to make money will not be in business for very long. Youth sport organizations and sport clubs are businesses and must make money to be successful. Operating as a nonprofit does not change this.
Nonprofit status, itself, is not really a “status” but rather the way an organization does business. Most people confuse this with tax exempt status which must be applied for and granted by the IRS or state taxing authority. Nonprofit status is something a business acquires through its structure. If there are no shareholders, owners, or others who benefit directly from the businesses activity and surplus revenue is used in furtherance of the organizations mission then the business may be considered to be nonprofit.
Problems arise in youth sport organizations when board members have incorrect or only partial understanding of what nonprofit means. Believing that nonprofits shouldn’t or can’t “make money” is one reason why many sport clubs are sadly underfunded.
A good example is in the ordering and sale of team equipment. Smaller clubs especially tend not to stock team equipment because they have no money or storage space for inventory. Thus equipment is ordered periodically for those who want it and members are charged exactly what the equipment costs. Selling items with no markup would never happen in a for-profit business.
It is in this way that the term nonprofit makes it more difficult for many smaller clubs to grow. Without solid business practices some nonprofits are only able to carry on with the same programs from year to year with little in the way of additional resources that can be directed to growth and improvement.
The nonprofit structure itself isn’t the culprit; it’s misunderstanding what what nonprofit means. Nonprofit businesses have to make money to stay in business.