Non-Profit or For-Profit Youth Sports? 4 Reasons For-Profits are Proliferating

Any knucklehead knows that the main difference between a non-profit youth league and a for-profit is that the non-profit pays no taxes, while the for-profit pays 30% or more of its profits.

For the 84% of youth leagues who are non-profit, being tax-free is Plan A, the only way to go.  But for the 16% that are for-profit, paying no taxes is too high a price to pay.  Plan B, for-profit, is a plan with more and more fans.  And for four good reasons.

First is that only for-profit leagues can distribute residual income, aka profits, to the folks who control the organization.  While non-profits can pay reasonable wages, league managers cannot pocket “profits.” Profits are the result of a “non-related business activity,” and is the reason many non-profits lose their tax-exempt status.  For the thousands of leagues who are run by committed volunteers, being non-profit keeps everyone exclusively focused on charitable activities.  But every year, a growing number of league managers think that volunteering is over-rated.  Instead, they argue, the profits the league makes should rightly flow to the people who run the league well.

Second is the limited supply and increasing demand for youth sports facilities—fields, courts, gyms, tracks and pools—which has driven many entrepreneurs to raise money to buy their own facilities.  For-profits have access to investors who can own a portion of the company or facility, or can borrow money from a large variety of sources.  Non-profits with cash can buy facilities, or can borrow (but with more difficulty than for-profits), but can’t have “investors.”  Instead, non-profits need “donors” who can never get their money back or earn a financial return, which limits their access to capital.

The third is the rapid professionalization of youth sports, the “4th dimension” of America’s sports economy.  League managers, athletic directors and coaches in the first 3 dimensions, pro, college, and high school are trained, experienced, certified, professionalized and paid (some paid very well).  By contrast, in youth, 79% of league managers and coaches are untrained, uncertified and unpaid.

But parents and players in youth sports are now applying much more pressure on leagues to provide “elite” levels of training and competition, in preparation for high school team selections and the ever-alluring potential of college scholarships.  To meet these ever-higher demands, more and more leagues are realizing that only if they are for-profit can they attract the right talent.  As gonzo journalist Hunter S. Thompson wrote, “When the going gets weird, the weird go pro.”

And the fourth reason is that even though non-profits pay no taxes, there are still large penalties for not filing your non-profit tax form 990 by the end of the 5thmonth following your fiscal year-end.  In fact, if your non-profit is under $1 million a year, the penalty is $20 a day or a max of $10,000, and if you’re $1+ million, it’s $100 a day or a max of $50,000.  The IRS reports that on any given month, about 65%, or two-thirds of the ~60,000 registered non-profit youth leagues are late or have filed incorrectly.  And then there’s the “death penalty” for not filing on-time three years in a row: the automatic revocation of your tax-exempt status.  Paying no taxes does indeed come with a price.

One final note:  Based on the experience of those league manager who have done it, converting a non-profit league into a for-profit entity is a relatively simple path.  The reverse trip, from for-profit to tax-exempt, is a rougher trip.

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