Tax-exempt organizations are entering into business arenas traditionally held captive by taxable commercial entities. Exempt organizations are becoming more entrepreneurial, but without proper advice there is a risk of nonprofits losing their exempt status or being excessively taxed. This webinar will provide an overview of options for new structures (joint ventures, hybrids, for-profit subsidiaries, etc.) and a discussion of issues stemming from related/unrelated business activities.
6. Option #1: Joint Venture
Independent
tax-exempt
For-Profit
Limitations:
Must maintain control over
aspects related to tax exempt
New
mission. Joint
Must be small in comparison to
overall activity
Venture
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7. JOINT VENTURE: CONTROL OPTIONS
Option Advantages
Retains control but allows for outside
“Controlled” input (unless wholly-owned)
Option to consolidate tax returns of
Corporation multiple subsidiaries in holding company
Nonprofit owns 50% of for-profit or
more
Create maximum options for input
“Non-Majority” (entrepreneur, employees, communities),
while retaining some voice
Ownership Parent nonprofit not taxed on some
Nonprofit owns 50% of for-profit or payments received from subsidiary
less
Parent nonprofit may avoid criticism for
any controversial decision of for-profit
8. Option #2: Maximize Business
activities within existing nonprofit
Business activities conducted
within non-profit corporation:
Tax-Exempt
Organization If related to exempt purpose,
no income tax on net profits
Business If unrelated to exempt purpose
Activities (UBI), nonprofit will have to pay
income tax on net profits and if
business activities grow beyond a
small part of overall activities
then nonprofit may lose exempt
status.
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9. Option Advantages
Access to grants and subsidies
“Not-for-Profit” with
Related business has no size constraints
Related Business
No income tax liability
Activity Less controversy
Appeal to entrepreneurially-spirited
volunteers
10. Option #3: Create a subsidiary
for-profit company
Advantages
Liability: Protects nonprofit assets
from debts of business (and vice-versa)
Tax-exempt Tax-free Dividends: Parent non-
profit can receive tax-free income from
Organization subsidiary in the form of dividends
(although dividends are not also
deductible by subsidiary).
For-profit
Subsidiary Disadvantages
Income subject to UBIT: Royalties,
rents, and interest from “controlled”
subsidiary are subject to UBIT.
Start-up/ongoing costs: more
expensive to run two corporations.
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11. Option Advantages
Write-off losses
“For Profit” with Access to capital
Unrelated Business Access to entrepreneurs
Access to jobs, image, and responsibility
Activity More freedom for operations
12. SEPARATION DECISION OPTIONS & RELATED ADVANTAGES
Option Advantages
Management and control
No Separation Organizational and staff development
Run for-profit as subsidiary of
Safeguard community purposes
Nonprofit
Shield from an uncertain market
Lowers start up costs
Focused purpose—less confusion
Separation
Run for-profit as separate entity Inspires confidence
from Nonprofit
Access to capital and human resources
No tax exemption issues
Protects parent organization from liability
14. Option #4: Governing Principles of a Contract Hybrid
Independent
For-Profit
Contracts Nonprofit
(1) Independent majorities on
each board
(2) Tied together with contracts
For-profit should negotiated at arm’s length
conduct all (3) If for-profit uses non-profit
unrelated business assets, nonprofit must receive
activities. fair value
(4) Boards independently review
and approve everything
(5) Benefits to for-profit must be
necessary, indirect, and
insubstantial
15. Option #4: Risks of a Contract Hybrid
Independent
For-Profit
Contracts Nonprofit
(1) Reporting requirements on
the New Form 990 may
result in more intense
scrutiny
(2) No IRS official recognition
16. Option #4: Benefits of a Contract Hybrid
Independent
For-Profit Nonprofit
Benefits:
(1) If structured carefully,
Contract Hybrid can avoid
much UBIT liability
(2) Contract Hybrid allows
nonprofit’s officers and
directors to invest in for-profit
(3) Payments from for-profit to
nonprofit can be deducted or
written off as expense
17. Option #4: Business Advantages of Hybrid Social Enterprise
In-Kind Equity
Consulting
Profit Sharing
Brand
Liquidity Events
Investor Guarantees
Nonprofit
Separate
For-Profit
Intellectual Property
Market Access R&D
Brand Marketing
Consulting
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18. Option #4: Hybrid Investment Strategies
Investors
Banks:
* Commercial Loans
* Equity
Social Investors: Foundations: Social Investors:
* Equity * Social Loans (PRI) * Grants
Foundations: Social Venture Funds: Foundations:
* Mission Related Equity * Social Loans * Grants
Independent
Entities Nonprofit
For-Profit
Hybrid Social Enterprise
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*Slide based on 2006 copyrighted material of Charly Kleissner
19. Option #4: Analysis of a hybrid
Purely Philanthropic Hybrid Purely commercial
Type of Traditional NGO Contractual Traditional for-profit
Organization arrangement between
NGO & business
Motives Appeal to goodwill Appeal to self-interest
Mixed motives
Methods Mission-driven Market-driven
Balance of mission and
market
Goals Social value creation Social and economic Economic value
value creation creation
Destination of Directed toward Reinvested in mission Distributed to
Income/Profit mission activities of activities or operational shareholders and
NGO (required by law expenses, and/or owners
or organizational policy) retained for business
growth and
development
20. Option #5: Convert to for-profit
Nonprofit
Different State Assets & FMV of sale
non-profit org Operations
Independent
For-Profit
21. Option #6: Create a for-profit and convert
non-profit to private foundation
Nonprofit
Independent
For-Profit $
Risks: Private
-IRS finding of self-dealing
-IRS finding of excess
Foundation
private benefit
22. Social Venture Limitations:
1. Profitability is not guaranteed
2. A venture may clash with your culture or
values
3. Ventures may generate unfavorable
publicity
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23. Option #7: Creating a
Legislative Advocacy Group
(1) Allows for political and
legislative lobbying
(2) Can be used with any previous
Nonprofit
combination of structures
501(C)(4)
24. Option #8: Changing Exempt
Purpose and Launching a For-Profit
Charitable Nonprofit
Educational Org
For-Profit
25. Find the listings for our current season of webinars
and register at
NonprofitWebinars.com
Chris Dumas
Chris@NonprofitWebinars.com
707-812-1234
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