Some youth sport leagues have chosen to become a 501(c)(3) nonprofit because of the benefits that type of structure allows. Exemption from taxes it the primary reason for wanting the designation, but other benefits include liability protection for the officers and directors and the ability to provide donors with a tax deduction. However, the paperwork and time deters some from going through the lengthy process. Once done, the status requires only a bit of upkeep, and the corporation founded can continue on indefinitely, continuing the benefits well after the filing.
A common misconception is that all nonprofits, including youth sport leagues, automatically have a tax exempt status provided by a 501(c)(3). This is not true, and therefore youth sport leagues are missing out on the cost savings and liability protection.
How to create a nonprofit 501(c)(3) for your youth sport leagues
First, create a nonprofit corporation entity by filing it with the state you reside. Many organizations will hire an attorney to help with creating and filing the bylaws and Articles of Incorporation. It is recommended that an attorney with prior 501(c)(3) filing experience be used to reduce time and cost from inexperience.
Bylaws are simply the rules that your organization functions by and the Articles of Incorporation are what will protect the Board from legal liabilities of the organization. This allows the corporation to be the holder of liabilities rather than the individuals in the organization, which is an increasingly greater concern in youth sport leagues, where injury, theft and other civil disputes can happen.
Second, apply for nonprofit status with the IRS with Form 1023. You may be tempted to quit at this step, as this can become quite lengthy. It is an application that basically reviews previous and future expected activity of the organization. The IRS is diligently working to prevent fraudulent use of the nonprofit, so they review the governing structure of the organization, its purpose and the programs it includes.
Form 1023 will also require you have any pertinent state tax exemptions and registration completed.
Third, apply for an EIN, or Federal Employer Identification Number. This number acts as the corporation’s social security number on tax documents. This is required whether or not the youth sport leagues have employees or not.
Fourth, assign a board of directors. There are state regulations on how many people are required to sit on the board, but it is based on the needs and size of the organization and its goals. Determine the best skills needed, and consider who is willing to give their time and talents to the cause, whether or not they are part of the specific group. Consider people in the community who have perspectives vital or important to the youth sport leagues you are working with.
Fifth, create a budget and a record keeping system. All organizations that deal with income and expenses require budgeting. Look at historical information as well as current income and expenses and have categories of each. Keeping good records of income and expenses will not only help with budgeting, but is required for nonprofit reporting. Board documents, financial statements including income and expenses, are legally required as part of being a nonprofit.
“A charitable organization must make available for public inspection its approved application for recognition of exemption with all supporting documents and its last three annual information returns.” Source:IRS 501(c)(3) status
Nonprofits are required to keep certain information available to the public, donors and the government. Checks and balances will help keep the organization safe, and a CPA who works with nonprofits is encouraged.