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CLUB MATTER

April 2003

Clubs Matter Get Informed About Liability

By Tom James

Forming a figure skating club comes with big decisions involving such things as tax issues and whether or not to form a nonprofit corporation. Questions and problems can arise even after some of these decisions are made.

As legal counsel for USFSA, I have prepared a guide for USFSA members and member clubs titled Formation of a Nonprofit Corporation. This guide deals with issues pertaining to the formation of a nonprofit corporation and tax issues related to that corporation.

How to Form a Nonprofit Club

The Formation of a Nonprofit Corporation guide contains information about the legal liability protection provided by incorporating. The following is a checklist of actions generally taken to form a club and obtain nonprofit, tax-exempt status. This process is subject to varying considerations of your situation, as well as state and local regulations.

1. Incorporate as a nonprofit corporation by filing Articles of Incorporation.

2. Hold an organizational meeting of the Board of Directors. (Actions that should be taken during this meeting are spelled out in the guide.)

3. Apply for tax ID number from IRS.

4. Apply for tax-exempt status.

5. Apply for all state and local tax licenses and exemptions.

6. Apply for nonprofit postal rates.

7. File annual tax returns.

8. Document, acknowledge and disclose contributions.

9. Properly classify workers and remit necessary employee withholdings.

10. Consult with professional legal, tax and accounting advisers.

However, throughout the year various questions and issues arise that may not be directly addressed by the Formation of a Nonprofit Corporation guide.

At Governing Council in Norfolk, Va., I will have an opportunity to present a summary of matters covered in the Formation of a Nonprofit Corporation guide and personally address questions.

Here I will cover two topics, giving members brief insight on these issues. But space is limited, so this information cannot be specific or detailed.

Unincorporated Groups

In some cases, members engage in organized skating-related activities, including fundraising, without forming a nonprofit corporation. This organized activity of an unincorporated group may be deemed an "unincorporated association" (i.e., an organized body of people who have an interest in common).

While not affording the participants and organizers limited liability (and potentially exposing their personal assets to the liabilities and obligations of the activity), the activity involves elements of "engaging in business." This includes generation of revenues, incurring expenses, use of facilities and/or equipment and related agreements (whether or not in writing) and bookkeeping/ accounting for the activities.

While the activity may be viewed as limited or informal in scope or nature, issues such as tax reporting and insurance are still relevant.

For example, an unincorporated association must have or use a federal tax identification number. If this number is not applied for and obtained, it may be necessary to use the Social Security number of someone involved in the activity. This is not recommended since it attributes matters to the individual with potential tax or liability consequences.

So an unincorporated association may appear to be a simple and informal way of engaging in an activity, but it should be done with knowledge of its nature and potential consequences.

Separate Activities

In some cases, a club that does exist as a nonprofit corporation may have different programs and activities that are conducted and/or managed separate from one another.

An example could be a synchronized skating team. While representing the club, this team may have a separate decision-making "board" or committee, separate fundraising groups, separate programs or events, separate travel schedules and arrangements, separate fees and separate use of facilities from the rest of the club.

If this is the case, this group may have different risks and obligations associated with its activities. It is advisable that these clubs evaluate the relative benefits and risks of engaging in differing programs under one nonprofit entity.

Keeping the different activities under one nonprofit group exposes all of the club's programs and related assets to the risks of one activity. While insurance is intended to cover the various activities, it may be best to separately incorporate certain activities to insulate various assets and programs from others. This action involves formalizing separate governance of programs, which will result in organizational, management and expense issues.

The point is not to advocate separate incorporation of differing activities, but to make member clubs aware of the issues so leaders can evaluate whether separate incorporation is advisable.

Get the Guide

If you have more questions about liability, legal and tax requirements, and forming nonprofit corporations related to your club, the Formation of a Nonprofit Corporation guide may help. The guide is available from the USFSA as a service to its members. The guide can be downloaded here (PDF) or request the guide by calling USFSA Headquarters at 719.635.5200.

Tom James is legal counsel for the USFSA.