College Sports Has Become a Billion-Dollar Business. Kentucky Is Embracing It

As the college sports business model transforms, the University of Kentucky athletic department is making a monumental shift: ditching its nonprofit status.

On Thursday, the school voted to shift the athletic department from an educational non-profit with tax exempt status, or 501(c)(3), to a for-profit limited liability company (LLC). The university’s board of regents will voted on the proposal, which will create an entity for the athletic department called Champions Blue, LLC, on Friday afternoon.

It’s a major, first-of-its-kind shift in college sports. Kentucky’s willingness to turn its athletic department into an LLC is an apt reflection of the professionalization of college sports. It also demonstrates that athletic department administrators themselves aren’t afraid to categorize their operations as full-fledged businesses.

“I wouldn’t be surprised if more athletic departments move in this direction,” Katie Davis, a CPA at James Moore and Co. who works with athletic departments nationwide, tells Front Office Sports. “Doing it now gives them a framework to adapt quickly as rules around athlete compensation and employment evolve.”

The athletic department said in a press release before the vote that the “changing landscape” of college sports, including NIL (name, image, and likeness) opportunities for players and the potential House v. NCAA settlement allowing schools to share millions of dollars in revenue with athletes, has prompted the shift. 

“Our mission remains the same: to put championship rings on fingers and diplomas in hands,” athletic director Mitch Barnhart said in the statement. “But how we accomplish that goal — how we finance our teams, protect our future and support our student athletes — will have to change.”

Now, as the revenue-sharing era approaches, schools like Kentucky see myriad benefits to switching to for-profit entities. “The strategy will provide the department with the flexibility to unlock new revenue streams through public-private partnerships and potentially other transactions, such as real estate,” the school said in a statement.

Advantages of an LLC

Davis does see several tax benefits to this structure. “By shifting revenue-generating activities and revenue share payments into an LLC, schools can limit their exposure to unrelated business income tax and private benefit scrutiny,” she says, suggesting that the LLC structure would still protect the athletic department from some types of taxes. She also notes that the move could protect the rest of the university from nonprofit scrutiny by creating “a clean boundary, helping universities protect their tax-exempt status while navigating the commercial realities of college sports.”

What’s more, the school may not have to pay much in income tax even with its LLC status, Davis notes. “If the entity reinvests a large share of its income into deductible business expenses like athlete payments, facility improvements, or staff salaries, the actual taxable income could be significantly reduced,” she says.

The school said Champions Blue LLC would operate similarly to two hospitals that are run by the university, but that are their own separate for-profit businesses. The university will build a “new governance board,” including school officials and outside experts, to run the holding company and serve as advisors to the athletic department. The athletic department already reports more than $200 million in annual revenue, among the highest in the nation.

There are multiple options for for-profit status structures, including C Corp to S Corp. C Corps are usually used by large organizations, while S Corps are used for small businesses. LLCs, on the other hand, can be structured for large or small organizations and don’t require boards to run them. They are also privately held and their financial dealings can be more opaque. 

Champions Blue would have a board, however, calling itself a public entity that hosts regular meetings. It would also be a “disregarded entity for tax purposes,” an athletic department spokesperson tells FOS, meaning it would be treated as part of the university from a tax standpoint. Davis notes that once the LLC starts making money, however, it could be taxed separately. “Champions Blue keeps us under the University umbrella, which was very important to us from a management standpoint,” the athletic department official said.

For years the prevailing wisdom in college sports has been that the nonprofit model benefited athletic departments nationwide: It allowed schools to pursue their “educational mission” while shielding athletic departments from paying taxes.

But as college sports became a billion-dollar industry, and dozens of athletic departments including Kentucky began reporting nine-figure annual budgets, their nonprofit status has been called into question: In 2022, for example, late-U.S. Rep. Bill Pascrell (D., N.J.)  launched an inquiry into whether big athletic departments like LSU should be stripped of their nonprofit status.

Ultimately, the benefits could outweigh the drawbacks as schools gear up to pay players.