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Should sports education group create a for-profit subsidiary?

Your Legal Questions Answered

Should sports education group create a for-profit subsidiary?

A sports education 501(c)(3) wants to open a U.S. sports federation as a subsidiary. In this case, would a for-profit subsidiary make sense for activities like a World Cup for the sport (organizing video submissions, advertising, etc.). I figured if a federation is operating on a global scale, it is better for the parent company (the controlling nonprofit) to have some legal distance to protect its 501(c)(3) status?  What do you think?

I generally recommend a for-profit subsidiary for a (c)(3) charity that is undertaking a substantial unrelated business activity and often recommend one where the risks of liability are significantly different from that of the parent, the legal jurisdiction of the activity is different, or the sources of support are significantly different or less reliable.

You seem to think that your World Cup would generate unrelated business activity, but videos of the sport, entrance fees for contestants and spectators, royalties on merchandise sales, and even concessions at events might not generate unrelated business taxable income (“UBTI”).  Your “advertising” might be operated as sponsorships that don’t count as UBTI.  Public radio and television have been doing it for decades.  And the U.S. Olympic Committee is a 501(c)(3).

The operation on a global basis might raise other issues, depending in part on how much activity you intend to operate directly abroad under different laws from the U.S.   For that activity, your subsidiary may want a subsidiary.

You haven’t given me enough detail on your business plan to make a specific recommendation.  It would be well worth your while to consult with an attorney who understands these issues as you start the development of your new activities.

Tuesday, June 15, 2021

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