Profit centers in nonprofit corporations. The first thing that probably comes to mind is “But, we can’t make money, we’re a nonprofit.” True. Most Community Associations are nonprofit organizations. However, the ability to “make a profit” if you are a nonprofit organization exists none the less.
Remember, the primary distinction between for profit corporations and nonprofit corporations is whether the income made by the entity can be distributed to the members. In for profit corporations, distributions of profits are paid to the members (or shareholders) in the form of dividends. In nonprofit corporations, the profits of the corporation are not paid to the members but are retained by the corporation to be used for the benefit of all of the members.
So, nonprofit corporations can make a profit. The bigger question lies in whether profit centers within community associations are good idea for the Association, the directors, and its members.
WHAT CARDS ARE IN YOUR HAND?
- Duties to the Association. As directors, you are charged with the overall duty of “preserving, protecting and enhancing the value and desirability” of your community. Within this overall purpose, you are required 1) to act in an informed manner as an ordinary reasonable person would act in similar circumstances; 2) to act in the best interests of the Association; and 3) to act within the scope of authority set forth in your governing documents and the law. If you are a community created after July 1, 1992, with the exception of the investment of reser4ve funds, the Colorado Common Interest Ownership Act makes directors liable only for willful and wanton acts or omissions only. It is unclear whether this provision of CCIOA supersedes the general standard of care owed by directors of nonprofit corporations. Your first and foremost question in venturing into profit making areas is whether the undertaking will preserve, protect and enhance property values and is otherwise in the best interests of the Association.
- Authorization in your documents. Often, Associations’ Declarations or Covenants, Articles of Incorporation, and Bylaws contain broad statements of powers which may be undertaken by the Association. These broad statements may be enough. However, you must be careful that the for-profit activity you are performing is not expressly prohibited by a “higher” document. Declarations and Covenants generally have precedence over Articles and Bylaws and Articles generally have precedence over of Bylaws. Finally, some Associations have been qualified as Internal Revenue Code §501(c) (3) charitable organizations. If your Association is a 501(c) (3) corporation you may be further limited by the IRS.
- Employment issues. Restaurants, bars, golf courses, and health clubs do not function without staff. Unless the Association operates its profit center under a “concession” format, it will probably have employees. Not only do employees mean that the Association needs to review and upgrade its insurance, it also means that the Association must be cognizant of payroll issues, benefit plans, discrimination practices, and areas of liability which an Association does not face without employees. If your employees will be driving, don’t forget to purchase the appropriate automobile insurance.
- The ADA and the FHAA. Inviting the public into your community to make a profit means that your Association will have to comply with more of the provisions of the Americans with Disabilities Act and the Fair Housing Act Amendments of 1988. This may mean adding ramps, upgrading bathrooms, and expanding doorways. When profit and the public get involved, the Association typically foots the bill for these improvements.
- Expertise. You are board members who are volunteers. You cannot be legal counsel, accountant, architect, manager, and engineer for your community. As directors, you will need to recognize when you need to hire an architect and engineer to review and approve plans for new construction or when a manager could better supervise the golf course staff. Developing profitable profit centers in your Association will require the same care, skills, and capital required to operate any for profit business. Consult with experts just as you would for your company and be willing to pay the price.
- Taxes. The IRS is crystal clear that any income which is not derived from members of an Association is taxable at a flat rate of 30%. Recognize that any profit you make from the public will be taxable. This includes profits from the sale of units acquired from foreclosures, development and road impact fees, green fees, and club membership dues paid by non-Association members, in addition to income from the services you provide. If the Association makes some money off a service provided to only its members, this money is not taxable. For instance, the Association may enter into a contract with a cable provider at a flat rate and charge its members slightly more for the service than the cable company, thereby making a profit.
- Insurance. The more people who visit your property, the greater chance an accident may occur. Profit making centers can increase the Association’s risk if someone is injured while on your property. Treat your profit center like the business that it is and obtain necessary insurance.
- Commissions, regulations, and laws. In some instances, the Association which undertakes property management functions and real estate sales, may be subject to real estate commission regulations, including licensing. Other services, such as transportation and telephone switch boards may require Public Utilities Commission licensing. It’s always a good idea to consult with legal counsel before you jump in, it can save money in the long run.
What are the odds of winning? Certainly, Association’s odds are high of making money by providing member desired services with a profit built into the fee without substantial risk. However, the more public the for-profit enterprise becomes the bigger stakes and the greater the odds of losing become. Associations should not be discouraged from undertaking “for profit” ventures. Directors, however, should be careful to evaluate the for profit venture in terms of how it will preserve, protect and enhance the value of the community. Furthermore, as directors, you should ensure that the Association is adequately protected through insurance, good contracts, bonding and other loss prevention measures from the potential liability it faces. Don’t forget that the for profit arm of your Association now faces liability from employees and the public, two sources of increased liability which it may not have faced prior to the for profit.