profit-making ventures for non-profits: promise and peril
DESCRIPTION
It’s not just Girl Scout cookies anymore. Even before the recession, non-profits were looking at earned income ventures in new and creative ways. Now, with public funding in steep decline, the drive to diversify revenues has become even more urgent. For-profit subsidiaries, social enterprises, “L3C” -- these new ventures are full of promise – and peril. As the lines blur and non-profits compete in the marketplace, their exposure ramps up – especially if not handled properly from the outset. What are the safest and most efficient ways to structure and govern such ventures? We will survey the tax, accounting and management considerations involved in these enterprises.TRANSCRIPT
Sponsored by: A Service Of:
Profit-Making Ventures for Non-Profits: Promise and Peril
Michael D. Aaronson & Richard Streitfeld
October 5, 2011
Sponsored by: A Service Of:
Advising nonprofits in: • Strategy • Planning • Organizational Development
www.synthesispartnership.com
(617) 969-1881 [email protected]
INTEGRATED PLANNING
Sponsored by: A Service Of:
Affordable collaborative data management in the cloud.
Sponsored by: A Service Of:
Today’s Speakers
Michael Aaronson CPA, Founding Partner
Hosting: Sam Frank, Synthesis
Partnership
Assisting with chat questions: April Hunt, Nonprofit Webinars
Rich Streitfeld CPA, Partner
Aaronson Lavoie Streitfeld Diaz and Co
Promise and Peril
Profit Making Ventures for Non-Profits
Michael D. AaronsonCertified Public Accountant
Richard StreitfeldCertified Public Accountant
To download a copy of the outline for this talk
click here
Why?Considering a for-profit venture?
What is your reason for considering a for-profit venture?
Is it a program that is related to the non-profit’s existing activities and core purpose, and will supplement that purpose as well as generate funds?
Or is it unrelated to the organization’s purpose and being contemplated purely as a vehicle to generate funds for the whole organization?
Both are valid...
But clarity on your goals is critical at the outset because your choice drives the structure of the venture.
Contrary to popular belief...
Non-profits have wide latitude in establishing for-profit ventures, even if it is seen as having an unfair advantage.
However...
The non-profit may be subject to normal corporate taxes for an unrelated venture.
Plan.No matter what, you’ve got to have a
50% of all businesses fail,and you have the additional concern of making sure the core mission and
financial stability of the non-profit itself is not threatened.
A rigorous business plan, just as if you were an individual planning to open a restaurant, is necessary.
The board and key management players need to achieve consensus before launch.
Who is your competition? How will they react? Say you are starting a coffee shop run by adults with disabilities. Will the popular venue down the street take umbrage and protest that you have an unfair advantage? Will they claim that in the press, or will the press be sympathetic to your cause?
What is your budget... month to month, several years out?
This is key!
Do worst case and best case scenarios.
How much money do you need to start and where will you get it?
How long will it take to break even? Can it be self-sustaining?
How deep are the sponsoring organization’s pockets and how much will it commit to?
How will you market the new venture?
Will staff be tempted to leave your existing organization if the new venture has better pay and benefits?
Examples...Forms of Organization
Non-profit starts a related for-profit venture within its own structure.
For instance...
A vocational school starts a catering business as a training program.
Non-profit starts an unrelated for-profit venture within its own structure,
and will be subject to Unrelated Business Income Tax (UBIT) rules.
For instance...
A museum starts a restaurant, open to the public even when museum is closed, and with several
additional locations around town.
The non-profit starts a related for-profit venture, owned by the non-profit,
but keeps it separate for legal and operational reasons.
For instance...
A Community Development Corporation establishes a Rental Management Company.
The non-profit forms and owns an external, unrelated venture,
solely to generate funds for its core mission.
For instance...
A food bank starts a walk-in passport office solely to generate funds for its core mission.
Advantages and Disadvantages
of the Different Structures
Integrated: one organization...
Pros Lower cost One structure and board No public confusion of purpose Unified management
Cons Separate records for unrelated business income tax Board unfamiliarity with a for-profit Deficit may drain the non-profit
Separated: non-profit owns or is linked to the for-profit but the for-profit is a separate entity...
Cons Higher costs for additional structure A potential for activities to drift so far from the organization’s mission, that the public is confused
Pros Wider latitude in choice of activities More Flexibility in determining pay and benefits Business focused and separate board Lower risk of IRS challenge on UBIT grounds, and subsequent spin-off
UBITUnrelated Business Income Tax
Even with paying UBIT, if the revenues of the for-profit activities are a substantial percentage of its total income, a spin-off may be needed.
There are many grey lines . For instance, AARP has been challenged on its UBIT exemption regarding sales of insurance policies.
There are many clear exemptions. For example, if all the work was done by volunteers or can be classified as a one-time activity.
Non-profits file a 990-T for UBIT, and may allocate non-profit overhead to the for-profit venture as appropriate.
For non-profits with “unrelated activities”
These are state by state, not federal.
Allows for “program-related investments” by foundations, individuals and institutional investors. Can be “tiered” by risk exposure.
Charters establish that they have “double bottom lines” so members are less able to challenge decisions on the basis of profit/lack thereof.
Untested; many see great promise of opening traditional lenders and investors to more socially beneficial causes, others see potential confusion and are more skeptical.
There are new structures and designations, likeL3C Low-profit Limited Liability Companies.
Thank you for joining in
Aaronson Lavoie Streitfeld Diaz and Co Certified Public Accountants
1604 Broad Street Cranston, Rhode Island
02905
phone: 401 223 0205web: alscpa.com
email: [email protected] [email protected]
Created by Rebel Headquarters
Sponsored by: A Service Of:
Find listings for our current season of webinars and register at:
NonprofitWebinars.com