Protect Your Private Status

Privacy Remains Your Most Important Asset

Published Monday, January 9, 2012

In these unstable economic times, attracting new members and increasing club revenue are often seen as jobs 1 and 1a for many general managers. Unfortunately, depending on how a club leader approaches it, successfully adding to the bottom line can actually endanger a club’s private status.

The Importance of Being Private
A tax-exempt private club is defined as being organized around a non-business interest enjoyed by its members. The foundation of a private club is the personal relationships and shared affinities of its members.

It is the personal, recreational and social aspects of a club that distinguish it from a traditional business. This is what makes private clubs unique and gives 501(c)(7) clubs some exceptional benefits from the federal government.

Because our industry focuses on meeting the social and recreational needs of our members rather than meeting traditional business/commercial goals, most private clubs are exempt from many anti-discrimination laws and regulations (including The Civil Rights Act of 1964 and the Americans with Disabilities Act) that apply to every other industry in the United States—helping to shield clubs from many liability claims.

While these exemptions may not seem that important to individual private club members, they should be extremely important to club leaders. Many lawsuits brought against private clubs relate to some form of discrimination—normally based on hiring or firing practices, the membership admissions process or the application of internal club policies.

Many of the claims are based on prohibitions found in The Civil Rights Act or the Americans with Disabilities Act. As such, the quickest and most effective defense for a club is to prove that it is truly private and exempt from those laws. Thus, maintaining private status should be of the highest priority.

Increasing Club Membership and Protecting Private Status
Most club general managers would love to see one or two (or three or four) new members join their clubs each month. That infusion of cash would do wonders for the bottom line and ease the concerns of many volunteer board members. Some club leaders may be tempted to help membership growth by “simplifying” the process a bit. However, by doing so, they could very well be jeopardizing their club’s private status.

One way to define a truly private club is by analyzing a club’s admission process. In lawsuits filed against private clubs involving membership admissions, the membership process is a crucial part of determining whether the club wins or loses.

Unlike business or professional membership organizations, private clubs pick their members after a highly selective process. The membership process helps club leaders ensure they find the right candidates for their clubs and, most importantly, demonstrates that the club is truly private because of its rigid adherence to strict admissions procedures.

So, what should a club do to protect itself while trying to increase revenue by growing its membership?

To begin, new members should only be solicited and sponsored by existing members. Members should be encouraged to bring in prospects and introduce them to other club members. Clubs should require that the prospect spends time with another member to ensure the prospect fits in with others and that he adds to the social component of the club.

From there, letters of recommendation should be secured for the candidate, and the nomination should then be passed on to the membership committee. After committee approval, the board and/or membership should have the right to voice objections.

The process outlined above is typical for most private clubs. However, when clubs fail to strictly follow these steps, problems arise.

For example, a private club should never utilize the public media, public access websites, ZIP code mail drops, or similar direct marketing methods to solicit memberships. Publicly advertising for members means that anyone can join, and that definitely does not help protect a club’s private status.

Additionally, any suggestion that a person brought forward for membership is “applying” to join should be avoided. While there is nothing incriminating or deceptive in the term, it could be used to establish the legal standing of a candidate to sue for admission. Club leaders and sponsoring members should emphasize that the admission process is discretionary and that no one may claim or assume membership until accepted by the club.

Finally, a club should not respond to unsolicited inquiries about membership. Membership in a truly private club is by invitation only, and any deviation from that standard can cause significant problems with private status.

While adding members would relieve some financial concerns for many clubs across the country, deviating from sound membership admission processes is not the way to do it. Maintaining a selective membership process (and protecting private status) will serve a club much better than any short-term financial gain seen from “easing” it.

Generating Revenue from Club Amenities and Protecting Private Status
According to court rulings on private status, a club must exist primarily for the social and recreational benefit of its members. That means the members are the ones who should be using the facilities.

Since members are the ones using the club, many in the private club industry have received another benefit from the federal government—tax exemption. The IRS provides this tax exemption because member involvement in club activities is not intended to generate profit for the club and there is no over-arching commercial perspective intrinsic in a club’s operation.

To remain tax exempt, the IRS limits the total income a club may receive from nonmember use to no more than 15 percent of the club’s gross receipts. However, to maintain its private status, a club must limit nonmember use of the club. Naturally, these two competing interests can pose a challenge to club leaders who wish to supplement their club’s income by renting out their facilities for weddings, golf outings or the like.

While all club leaders know they must be careful to avoid eclipsing that 15 percent threshold, they sometimes fail to realize that use of the facility by too many nonmembers can jeopardize their club’s private status by functioning less like a private club and more like a banquet hall or daily-fee golf course.

To avoid this, clubs should never advertise their ballroom facilities or other club amenities to the general public. Any kind of advertising might exhibit a spirit of commercialism that rivals other public facilities in the community.

Most importantly, club leaders must remember that extensive use of the facility by nonmembers (even though that use may generate no more than the 15 percent threshold allowed by the IRS) still flies in the face of what a private club is created to do.

It is easy for most general managers to track revenue generated by nonmember use. It is far more difficult to track the degradation of the club’s exclusive nature due to nonmembers use, or if the club looks like a commercial entity because of nonmember activities.

When looking to generate more money from the use of the club’s facilities, a better tack to take is to redouble efforts to make the club’s members aware of the amenities on property. Allowing nonmembers to use club facilities can sometimes generate far more harm (the loss of private status and its shield against discrimination claims) than the financial gain could ever be worth.

Fundamental Factors
When determining whether a club is truly private, courts have traditionally looked at three main factors: (1) the extent to which club’s facilities and services were limited to club members and their guests; (2) the exclusivity of the club (i.e., its membership process); and (3) whether the club advertised publicly for new membership or publicly advertised for its services.

A slip-up in one of these areas alone will not doom a club, but the more a club steps away from the expected course of conduct, the more likely it will jeopardize its private status.

When club leaders begin discussing how to increase the membership rolls or maximize profit from the club’s facilities, they should also talk about ways to ensure they preserve their private status. Though it may be hard to say “no” to quick revenue, following the right course will often protect a club’s future far more than could be imagined.

Brad D. Steele is NCA’s vice president of government relations & general counsel.