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Should You Inc. Yourself?

by Warren Hernand, J.D., Corte Madera, California

You can choose the legal and financial forms that best match the purposes and goals of the founders.

For purposes of this article, assume that you are a California croquet club. If your club is in another state, the rules may differ somewhat, but the principles are the same.

You should check whatever I suggest with your local counsel. If your club does not have benefit of counsel you may wish to consider recruiting a lawyer into croquet. The main expense involved in the incorporation process will be legal expense for professional services which you may be able to get pro bono (gratuitously) if you have an interested lawyer/member willing to undertake the project.

You may also find that a local law firm will be willing to assist you at nominal cost in exchange for the public relations benefit, good will and expectation of future business from your members.

While it may be possible to avoid the use of an attorney to incorporate your organization, it would be advisable to at least have your Articles of Incorporation, Bylaws, and Application for Non-profit Status reviewed by a lawyer before filing. Errors or omissions caught early stage are less costly to correct than if left for later. (See examples of documents accompanying this monograph.)

If you are a group of people who have come together to get some croquet going in your area, you have a series of choices to make about what kind of organization you are going to be. That decision depends on a number of factors, such as:

  1. whether you will play on public land or private land;
  2. whether you are starting out independently or under the umbrella of another institution, club, or multi-sports facility;
  3. whether you wish to establish a society of croquet enthusiasts limited to your own social circle, or to cast a wider net and invite participation of the broader public into your enterprise; and
  4. whether you are to be primarily a social club with a croquet focus or a sporting club organized for training and competition.

Until you have explored such questions thoroughly, you have no rational basis for choosing one kind of organization over the other.

Moreover, as long as your group is simply meeting and exploring ways of creating a facility or finding space to establish a club, there is no compelling reason to incorporate. However, as soon as you determine where and under what circumstance you will operate, you will then be well advised to consider incorporation. The main consideration will be the members' potential liability.

If you are, in fact, just a group of friends meeting together to play croquet, your legal status is that of an Unincorporated Association, which is similar to a Partnership, but with some small differences. Unincorporated Associations generally do not register with the state and have the freedom to act informally, with few legal restraints.

The downside of operating as an Unincorporated Association is that members of the association may under some circumstances be held legally responsible for liability the Association may incur. In our litigious society, this possibility--as unfair as it may be--must be taken into account.

One of the objectives of incorporation, whether for profit or non-profit, is to shift liability from the individual members to the corporation. In other words, incorporation acts as a shield to protect the members from risks such as guest or player injuries.

TO INCORPORATE OR NOT TO INCORPORATE?

The corporate form has other benefits besides protecting from liability. It is a well recognized and well understood legal entity governed by clear statutory guidelines regarding what activities are permitted, director standards of conduct, and internal governance. If your club is going to be around for awhile and actually accomplish anything - that is, enroll members, collect dues, and sponsor events - you should incorporate.

PROFIT-MAKING OR NON-PROFIT?

If you organize as a general business corporation (that is, potentially profit-making), you will NOT be tax exempt (either for State or Federal taxes), you may NOT receive tax deductible contributions, and you ARE subject to a tax on profits (the excess of income over expenses).

A non-profit corporation, on the other hand, pays no state taxes on profits; may, if approved in advance by the IRS, be exempt from Federal taxes; and in some cases may have donors who are allowed to deduct gifts to the club from their taxes. Furthermore, in California and some other states, the immediate savings from non-profit status are significant because, except for a small filing fee, the annual minimum tax is waived.

MUTUAL BENEFIT OR PUBLIC BENEFIT?

Non-Profit corporations can be organized for either Mutual Benefit (of the members) or Public Benefit (to benefit the public). The Articles of Incorporation of a Mutual Benefit Corporation generally provide for dividing the assets among the members upon dissolution of the corporation; the assets of a Public Benefit Corporation, on the other hand, must be distributed to entities whose purposes are broadly consistent with the organization's Public Benefit status.

The majority of croquet clubs have opted to be Mutual Benefit organizations, and to forego Federal exempt status. As far as I know, only two local croquet clubs in the United States have successfully opted to organize as Nonprofit Public Benefit corporations: The Denver Croquet Club and the San Francisco Croquet Club.

If you should decide to explore the Public Benefit Corporation route, you need to answer some fundamental questions:

  1. Will you operate on public land or on private land?
  2. Do you wish to be a fairly exclusive social group of croquet players, or do you wish to seek support and participation from the general public?
  3. Does your organization evidence a commitment to public service by providing free or low-cost recreation programs to the public and providing volunteer and educational services and raising money for worthy causes; or are you committed to providing recreational benefits to a limited circle of friends and acquaintances well within your control and regulation?

Both the Denver and the San Francisco clubs began their corporate lives as Mutual Benefit corporations - private clubs operating by agreement with city park administrations on public turf. As these clubs grew and developed, their public benefit roles naturally evolved out of their service to the general public and the agreements they made with public agencies to meet City policy requirements for private clubs to operate on public property.

These clubs were already operating like Public Benefit organizations, through their financial contributions to the City, donation of physical improvements and maintenance cost, and the free or low-cost programs offered to the public. So, it was worth the effort for these nonprofit clubs to become Public Benefit Corporations for the financial advantage such status would bring: Not only could they accumulate funds without paying taxes, but they could also solicit contributions from donors who could claim a tax deduction for their cash or gifts. Only Public Benefit Corporations may qualify as IRC 501(c)(3) tax exempt organizations.

Having chosen to seek Federal tax exempt status, there is only one more choice to make.

SPORTS PROMOTION OR EDUCATIONAL?

The Denver club applied and gained their 501(c)(3) status on the basis of "educational activities," following the lead of the Croquet Foundation of America, which has the identical corporate status. The San Francisco Croquet Club, on the other hand, successfully opted for the exemption on the basis of "encouraging local, regional, national, and international sports competition."

Both exemptions are valid. However, I believe that the latter - encouraging competition in a recognized sport - is the broader category, less subject to challenge, and the more appropriate of the two for a local croquet club.

It is important to note that the Federal examiners are quite strict in determining eligibility for awarding the coveted 501(c)(3) status. You will have to prove your case, convincingly. You may be asked to provide numerous documents, including printed articles on your organization's programs, advertisements and fliers on public service activities, letters from park department executives, and the like. Pictures of the sport could be quite useful, or educational materials from the USCA or the Croquet Foundation of America.

When the Federal examiner reviewed the application for the San Francisco Croquet Club's status on the basis of encouraging sports competition, it was necessary to convince the examiner that USCA Tournament Croquet was:

  1. different and more highly developed than the garden variety croquet she recalled from childhood; and
  2. primarily a serious competitive sport, and only incidentally a recreational activity.

We have reviewed all the fundamental choices, in the order in which they will be made, with regard to incorporation. They are quite simple. If that is not apparent, you probably haven't yet devoted enough thought and discussion to exactly what kind of club you want to have and precisely what your organizational goals are. Making those determinations, as a group, is the beginning of your incorporation process.

GETTING STARTED

There are three basic documents you will need to create as a part of your incorporation process.

  1. Articles of Incorporation;
  2. By-laws; and
  3. Standing Rules (sometimes called Member's Code).

The Articles of Incorporation is the official document that is filed with the Secretary of State. It is like a club constitution. In some cases, it may be very brief, setting out only the barest essentials as required by law. In other cases, the Articles might be quite detailed and complex. If you intend to seek recognition from the IRS as a 501(c)(3) corporation (to which donations are deductible) you will be required to include certain promises in your Articles that generally are not required simply to incorporate as a profit or a non-profit corporation.

The By-laws set forth the formal operational rules of the organization, such as:

  1. Classes of membership (voting or non-voting);
  2. Dues and assessments;
  3. Number and powers of directors;
  4. How directors are elected;
  5. When meetings are held;
  6. How officers are selected;
  7. Duties of the officers;
  8. Provision for amendments to the By-laws.

Generally speaking, By-laws of all organizations are fairly standard, addressing most of the same type of issues. The document is not usually filed with the State.

The Standing Rules set forth the policies and procedures that are unique to your club, such as:

  1. Definition of resident and non-resident members, honorary members, student members, etc.;
  2. How a member may be terminated;
  3. Specific rules pertaining to guests;
  4. Committees; and
  5. House Rules

Having officially filed your Articles of Incorporation (and received the documents back from the Secretary of State under the Official Seal) you are a corporation. If you have requested non-profit status, you will also receive a notification letter from your State taxing authority.

Keep your official documents in a safe place, along with minutes of your Board of Director meetings. You will be informed of the type of annual report, if any, that your state requires to maintain your non-profit status.

It is important to maintain excellent financial records of your club's income and expenses, itemized by categories, so that you will be prepared to accurately report, if required, to tax authorities.

Once having become a State recognized non-profit corporation, you may choose to follow the example of other publicly supported clubs, like San Francisco and Denver, and attempt to attain the status of a public charity allowed to accept donations that are deductible by the donors. Your ability to achieve this status will be dependent upon your club's being organized FOR THE BENEFIT OF THE PUBLIC - not just the members. You must be prepared also to convince the Federal examiner that your club is, in fact, "fostering competition" rather than merely "providing recreation," if that is the basis of your application. Public benefit status brings with it more restrictions on what your club may or may not do.

Nonetheless, if you do not own your own land and buildings, are utilizing public facilties, and depend on receiving public donations in addition to dues, you may find the additional time and expense necessary to organize as a public benefit corporation a worthwhile endeavor.

There is no question that as a public benefit corporation with 501(c)(3) status, you can expect more favorable recognition from public authorities with whom you need to negotiate for the use and maintenance of publicly owned land and buildings.

Choose a form for your croquet club that best fits your present circumstances and opportunities and affords enough flexibility for growth. If your organization does grow and evolve, as all living entities do, the form can be changed.

As an attorney, I must counsel the kind of prudence that would see you though the worst imaginable happenings - like the $15,000,000 liability suit of an innocent member of the public struck by a ricocheted jump shot.

But as a croquet enthusiast, I would ask only that you set up a structure that will accommodate growth beyond your most outrageously optimistic projections.

(EDITOR'S NOTE: The preceding article is reprinted by permission from Volume Two of the Croquet Foundation of America's MONOGRAPH SERIES ON CLUB BUILDING, ORGANIZATION, AND MANAGEMENT. The print version includes complete text examples from the Denver Croquet Club of all the legal documents discussed in the article.)

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