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OVERVIEW

• How fees differ from payments
• Fees penalize lesser unit holders
• Therefore, use fees only in penalty situations
• Previous accounting manuals have not treated this matter correctly. Therefore many clubs are not using fees in the correct manner.

Money received from a member can be classified either as a Payment or a Fee. If it is deemed a payment, the member will receive units based on the current unit value. Fees, on the other hand, earn no units. It is important to understand what happens to members' values when fees are assessed.   

Assume a two-person club, made up of Able and Baker, with 100 units outstanding. Able owns 90 of the units, and Baker 10. If both members contribute $100, classified as a fee, the club's total assets have increased by $200. Of that, Able's value has increased by 90%, or $180 and Baker's by $20.  

Contrast that with having each member contribute $100, which will be classified as a payment. Assume that the total value of the club, before the payment was $1,000, making the unit value $10  [$1,000 divided by 100 units].

Each member contributes $100 and receives 10 units. Now Able has 100 units and his value is $1,000, while Baker has 20 units with a value of $200.   

Compare what has happened to Baker. If his $100 contribution is classified as a Fee, his contribution has bought him only $20 in increased value, while if the contribution is classified as a Payment, the contribution has bought him $100 in increased value. In other words, Fee classification has penalized Baker, while Payment classification has not.  

It is for this reason, that we say that Fees should only be employed when the intent is to penalize. Examples of valid uses of fees include: 

• Late Fee Charge. Some clubs charge a fee when a member's monthly contribution is received after a certain deadline. In this case, the fee is a penalty which increase the value of all members at the expense of the guilty party.
• Bounced Check Charge. When a member's monthly check is returned by the bank because of non-sufficient funds [NSF], the correct treatment is to  assess a fee against the offending member. This will penalize that member and reward all the others. Do not, as some clubs do, treat the receipt of the fee as income. This negates the deduction of a valid club expense [the NSF charge].
• Initiation Fee. Some clubs feel that new members should share, to some extent, in the start up costs that the older members have incurred. There is nothing wrong with this, as long as the amount of the fee is not exorbitant. $25 seems like a reasonable figure. This is a penalty for the newer member, and the older members are rewarded. Such newer members will, in turn, be rewarded as still newer members join. By keeping the amount reasonable, the practice is equitable and no one gets hurt badly. Do not confuse this Initiation Fee with something called Non-Refundable Initiation Fee. There really is no such thing as a Non-Refundable Initiation Fee. To see why, Click here.

Because of some very questionable documentation in the accounting and software manuals, many clubs have been in the habit of assessing fees to raise funds to pay administrative expenses. We have covered the history of that practice in a separate section, called Expenses. Click here to see that discussion. The practice of assessing fees for expenses can lead to great imbalances among the unit holders. Click here  for an article on this subject.

For years, users and writers of manuals, alike, have ignored the negative ramifications of fee assessments.  Restricting the use of fees to penalty situations will result in fairer results for all club members