Do Private Clubs make money?

This question stems from a misunderstanding of what exactly constitutes a private club.  The term  “private club” comes from the name of the TABC permit issued to non-profit entities like clubs and organizations which is called a Private Club Registration Permit.  It does not refer to a night club for members only, for example.

The Private Club Registration Permit is issued to non-profit entities including lodges like the Veterans of Foreign Wars (VFW), Elks, etc.  It is not a license to sell alcohol by the glass.  It permits the licensed organization to serve alcohol to its members while charging a service fee by the glass.  By doing so, the organization can keep its inventory of alcohol replenished and the club members are discouraged from over-drinking as every glass comes with a monetary cost just like buying a drink at a bar.  It’s a win-win.

Since the club is a non-profit entity, the members of a private club always jointly own the alcohol inventory which theoretically prevents them from selling it back to its members. Consequently, the club needs the ability to charge a service fee by the glass and the Private Club Registration Permit allows them to do this.

It’s not just organizations like the VFW that form private clubs.  Over the years, the courts have found that anyone, including restaurant owners, have the right to form a private club and obtain a Private Club Registration Permit. Private Club Registration Permits can be issued by TABC anywhere in the State of Texas where not prohibited by local city ordinance, including areas that are otherwise completely dry.  For this reason, it’s no surprise that businesses like restaurants located in dry areas have flocked to the private club concept as a means to provide beer, wine and mixed drinks to their customers without having to serve it free of charge.

In this scenario, a restaurant owner forms a non-profit corporation or an unincorporated association of persons, signs up members and files for a Private Club Registration Permit from the TABC (a task that is next to impossible if you’ve never done it before).  As customers come through the door to dine, anyone wishing to have a beer, a glass of wine or a cocktail can sign up to be a member of the club and be served.  When the check comes, the new member will see a service charge for the drink just as if he bought a drink at a restaurant with a regular liquor license in a wet area.

So is the restaurant making money off this transaction?  Yes, it is. The club itself is a non-profit entity. It cannot make a profit. Nor does it have the manpower to serve drinks.  The club hires the restaurant owner’s for-profit business to manage the alcoholic beverage service for its members. In exchange for providing this service, the club pays the restaurant a share of the service fees collected from members. It does so under the terms of a management agreement between the club entity and the for-profit entity that operates the restaurant (known as the “management company”).

The management agreement is voted on by the club officers and members making the arrangement legal and binding.  The club retains just enough of the service fees to pay for new alcohol inventory and other expenses such as permit renewal fees.  The remainder is paid to the management company as compensation for providing the alcoholic beverage services.

Depending upon the amount of sales generated by the service fees, this can be a lucrative arrangement to the management company. Of course, private clubs that operate in environments that are more akin to a night club are likely to have many more members than a club operating inside of a restaurant and thus will generate more service fees.

We do not recommend that you attempt a private club formation or TABC application on your own. It’s extremely difficult and involves membership meetings, various legal agreements, banking arrangements, etc.  We’ve been doing private club applications for over 30 years and we recommend discussing your project with us before moving forward.

(C) 2015, Texas Liquor License.

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