We Want to Give Away Memberships to Our Club in Exchange for Donations. Can We Do That?

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The short answer to this question is yes, but it is assuredly a qualified yes. This operational policy does not exist for some businesses because of the classification of contributions and revenue actions. Non-profit organizations can choose to consider payments from specific individuals as either dues or donations, but companies that are focused on marginal cash flow will have a difficult time using this policy effectively in terms of accounting.

An example would be an exercise gym that sells “memberships” for a set price over a designated time period. This fee is clearly a profit-driven revenue action required for access to the gym equipment. Nonprofit businesses have more latitude, as any typical 501(c)3 company can operate as an organization that takes donations and allows contributors access to any benefits of the organization. The question becomes which type is best suited for the club in terms of protecting cash inflows.

Members Versus Donors

The general rule regarding a contribution versus a dues payment is whether the paying individual received anything of intrinsic value as a result of the financial transfer.

If a membership includes access to certain facilities that are restricted to non-contributors, then there could be some benefits of membership. Examples of those benefits could also include being allowed to vote on certain initiatives of the club. This usually means that the club would inherently respond to any allowed collective input as well.

This is a very different relationship than merely recognizing an individual as a donor. Being a donor normally indicates the financial transaction was conducted voluntarily by the contributing party with zero consideration given in return. Such a business relationship allows the receiving organization to act freely in using the funds as they see fit. This is also an example of a pure gift, or charitable contribution.

So the bottom line is that members will typically have certain assumed privileges within the organization, such as regular admission to a clubhouse – whereas donors are normally powerless without achieving a specific level of contribution to become a full beneficial member.

Set the Parameters First

The ability to use membership contribution is legally determined by the tax records. Not only will payments be classified as contributions, but each member contributor must be supplied a tax statement at the end of the each year. Proper detailed ledger maintenance is very important, especially for organizations with significant assets and a high volume of member contributors. Using the donation access model can clearly put the funds in a non-taxable category. Depending on the type of organization, donations can also be used in facility operation budgets as well as long as the organization or club does not show a profit at the end of the tax year. This can be especially solidified for tax purposes when there is an established program for donation redistribution to certain charities or organizational drives. Once the rules for membership are determined they will be in effect for an entire accounting year, so always prepare for the long-term use of the associated model.

Contribution Model

There are several rules that organizations must follow when accepting donations from associate members. While primary donations will normally be a set fee within a certain time period, which is usually one year, allocations can also be made for pledges to specific events and recurring gifts. Non-profit organizations can also offer different classes of membership based on donation amounts and level of involvement within the mission of the organization. It is vital that all guidelines for membership and donation classification be stipulated before the process begins to ensure effective application throughout the first year. Necessary adjustments in policy can then be made at the end of the year.

Dues Model Membership

While there are usually some benefits of being an organization member, “dues” are still considered as donations by the Internal Revenue Service. The IRS is ultimately the primary concern when determining which operational model to choose. There are some definite advantages to having a membership program, even if it does change the nature of the relationship between the club and its primary regular associates. The dues become an immediate and dependable source of revenue each year when fees come payable, which gives the management staff an idea of how much cash flow can be generated based on the size of the membership or associate list. Dues that accrue in January will not be evaluated for tax purposes until an entire year later, which gives the club benefit of the resources throughout the remainder of the year.

Evaluating the Legalities of Your Organizational Structure

There are some legal issues that may also be associated with making a change in dues or donation club policy. Local chapters of national associations may not be able to make this change if the national book of rules for operation prohibits the shift. Major national organizations actually make most of their income on per capita tax from the local chapters based on the membership rosters. Organization associations are governed from the top down just like for-profit businesses, and all primary central chapters make the rules. This can include allowances for membership voting on certain club business decisions as well as the defined benefits of membership. And the most important overall aspect of operating for all beneficiaries – whether they be members, donors or just associates – is ensuring the business licenses are properly listed as 501(c)3 companies for all tax and employment purposes, including payroll. Members and associates are allowed to donate their time as well as money, but time is not generally allocated as a requirement. Time donations are mere contributions with no apparent consideration and no financial evaluation in most instances.

Special Licensing

Clubs or organizations that sell alcoholic beverages or host wagering transactions will normally need a gaming license as well as alcoholic beverage license, which is issued by local government. While this does not necessarily seem to concern membership or donor status for associates, many small communities implement local ordinances that stipulate that the only individuals who can be served must be members unless the club has scheduled an event that is open to the public. Maintaining a license to operate in full functionality can still impact the type of associate structure any club or organization chooses when developing the best business model for the particular organizational mission.

This business transition is not one to be taken lightly, as the decision on associate type typically lasts a year after donations are made or dues are paid. The scope of direction and focus of the organization is important to the decision and conducting a comprehensive feasibility assessment is a good first step.

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