With the NFL Draft just passing and the NBA Draft looming, one thing to pay attention to is how many athletes start their own nonprofit organizations after they sign their first professional contracts. A nonprofit organization is a charitable organization that does not exist to create a profit. There are a number of reasons why starting a nonprofit is a great idea for an athlete besides the obvious that it is a good PR move. A couple of those benefits are tax exemptions and the shield of personal liability.
First and foremost, a nonprofit is eligible for tax exemptions that for-profit corporations do not qualify for, such as an exemption from corporate income tax. A nonprofit organization must file annual tax returns, must state any changes in its purpose and activities, and must succumb to periodic audits to confirm it continues to follow applicable standards. In addition to being exempt from federal income tax, nonprofit organizations also may qualify for state and local tax exemptions by meeting certain criteria. Furthermore, nonprofit organizations may qualify for tax credits, which reduce the amount in taxes they pay at the end of the year.
Second, an integral benefit of a nonprofit organization is the shield of personal liability it provides. Board members, officers, as well as employees of the organization have certain protections from personal liability. Creditors can only go after corporate assets, thus the individuals who manage, work for, and volunteer for the organization are not liable for corporate debts, unpaid organization debts, or lawsuits against the organization. As an extra precaution, it is advised to purchase liability insurance once the nonprofit organization is incorporated.
There are things that anyone, including athletes, looking to start a nonprofit organization need to be aware of in order to run a legitimate nonprofit organization and enjoy the benefits thereof. First, in order to avoid termination of nonprofit tax exemption, you must comply with tax laws and IRS regulations. If tax exempt status is revoked, the once nonprofit organization will be taxed as a regular taxable corporation, thus all income is taxed and donors are not able to receive deductions for their donations. Moreover, gifts received under false pretenses are taxable income and officers and directors would be subject to payment of excise taxes. Other penalties that could occur are fines, penalties, and back taxes on a nonprofit organization that violates the rules.
Once you are aware of the benefits, disadvantages, and problems that could arise if the nonprofit status is abused, then all that is left is to start your nonprofit organization. At HEITNER LEGAL we can guide you through the process of starting your nonprofit organization, from obtaining research to incorporating your nonprofit organization. Additionally, we will inform you of the proper way to run the nonprofit organization in order to enjoy the benefits and avoid any abuse which could result in fines, penalties, or even termination of your nonprofit tax exemption.
Resources:
Joanne Fritz, Before you Incorporate as a Nonprofit – Pros and Cons, About http://nonprofit.about.com/od/nonprofitbasics/bb/corppros.htm
Robert Vaux, Tax Advantages of a Nonprofit, Chron http://smallbusiness.chron.com/tax-advantages-nonprofit-10551.html