Understanding Business Structures in Sports

1. chapter4 Business Structure Lonni Steven Wilson, Medaille College

2. Key Chapter Objectives • Understand why a business structure affects a company financially. • Understand when to use each type of business structure. • Define the requirements for the types of business structure utilized in sport. • Compare the advantages and disadvantages of sole proprietorships, partnerships, corporations, and limited liability corporations or limited liability partnerships.

3. Government Structures The text does not focus on government structures. However, some things are important to note: • Government entities can run numerous sport entities (e.g., park and recreation departments, high school athletic departments, community centers, public college athletic programs, and numerous other programs sponsored in whole or in part by the public). • Most sports organizations throughout the world are owned or operated by government entities. • Olympic programs in most countries are run by the government.

4. Nonprofit Organizations • A nonprofit status is given if the organization has a cultural, artistic, educational, or other public benefit. • Many sports organizations are set up and run under a nonprofit business structure.

5. Key Issues for Nonprofits • Obtaining and filing paperwork with state and federal agencies • Obtaining the 501(c) designation for tax purposes • Once tax-exempt status is maintained, complying with government regulations and filings to maintain nonprofit status

6. Types of Business Structures • Sole proprietorship • General and limited partnerships • Subchapter S corporation • C corporation • Limited liability corporation or partnership

7. Sole Proprietorship A sole proprietorship is a business owned by a single person. • Most businesses in the world are sole proprietorships (Cheeseman, 2001)(e.g., Big Ted’s Hometown Buffet, Slick Kitty’s Piercing Palace). • Independent contractors such as pro bowlers, figure skaters, and race car drivers are also sole proprietorships.

8. Advantages of Sole Proprietorships • Total control over decision making • Revenues taxed only once • Great flexibility • Easy to form • All profits retained by owner • Less concern about confidentiality • Easy to sell • Fewer government restrictions

9. Disadvantages of Sole Proprietorships • Limited managerial experience • Unlimited personal liability • Lasts only as long as the owner lives • Limited access to capital funds

10. Partnerships General and limited partnerships represent a division of ownership. • General partnerships: Individuals or groups combine resources to share in operating, managing, and controlling and also in profits and liabilities. • Limited partnerships: One partner manages; others are financial partners only (limited partners).

11. Advantages of Partnerships • Some control over decision making • Revenues taxed only once • Great flexibility • Easy to form • All profits retained by owners • Easy to sell • Fewer government restrictions

12. Disadvantages of Partnerships • Limited managerial experience • Joint personal liability • Limited access to capital funds • Lasts only as long as partnership survives

13. Subchapter S Corporations • May have up to 35 shareholders • Must be based in the United States • Can own subsidiaries Tax-exempt S corporations (e.g., charities) can own shares. At one point in the 1990s, 45% of all corporations were subchapter S corporations (Marullo, 1997, February).

14. Advantages of Subchapter S Corporations • Income flows directly to shareholders (shareholders pay taxes as personal income) • Not subject to double taxation • Can own subsidiaries (helps insulate them further from liability)

15. Disadvantages of Subchapter S Corporations • Cannot be owned by another corporation or partnership • Can issue only one form of stock

16. C Corporations • Also known simply as corporations • “Fictitious” legal entities whose formulation complies with specific state laws • Need to develop bylaws and articles of incorporation that specify how they will conduct business • Can be formed in any state; Delaware the “friendliest”

17. Contents of Articles of Incorporation • The corporate name • The number of shares the corporation will issue • The corporation’s initial address • The name and address of each of the initial incorporators (Cheeseman, 2001)

18. Advantages of C Corporations • Unlimited life of the corporation • Liability limited to extent of corporation assets • Creditors not permitted to come after individual investors for payment over and beyond their equity investment • Ownership interest easily transferable (shares) • Ability to hire a broad base of talented managers • Tax benefit: dividends paid to corporations are 70% tax free • Greater bargaining position with vendors who are more willing to provide credit to a corporation versus a sole proprietor (single owner) • Ability to issue publicly traded debt and equity

19. Disadvantages of C Corporations • Complex formation process • Need to answer to shareholders who might have ulterior motives • Sometimes onerous government regulations • Double taxation (corporation is taxed; dividend income to shareholders is also taxed)

20. Limited Liability Corporations and Partnerships Some of the benefits of corporations and partnerships without some of the drawbacks of typical corporation creation

21. Advantages of Limited Liability Corporations and Partnerships • Classification as a partnership for federal income tax purposes • Liability protection afforded to corporations • Can be owned by another corporation or partnership • Easy and inexpensive to form

22. Disadvantages of Limited Liability Corporations and Partnerships • Newness, no national standard • Each state thus has unique rules and regulations

23. Questions for In-Class Discussion • The NFL currently does not allow any team other than the Green Bay Packers to have any shareholders. Should the NFL change this rule? • Give the pros and cons of public ownership of a sports franchise. Should more teams be publicly owned so fans can be owners? • With all the money the NCAA generates, should it still be considered a nonprofit organization? • Would you ever want to start your own business? If so, what do you think you would need in order to be financially successful?