Profit-Making Ventures for Non-Profits: Promise and Peril


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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.

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Profit-Making Ventures for Non-Profits: Promise and Peril

  1. 1. Profit-Making Ventures for Non-Profits: Promise and Peril Michael D. Aaronson & Richard Streitfeld October 5, 2011A Service Of: Sponsored by:
  2. 2. INTEGRATED PLANNINGAdvising nonprofits in: •  Strategy •  Planning (617) 969-1881 •  Organizational Development A Service Of: Sponsored by:
  3. 3. Affordable collaborative data management in the cloud.A Service Of: Sponsored by:
  4. 4. Today’s Speakers Michael Aaronson Rich Streitfeld CPA, Founding Partner CPA, Partner Aaronson Lavoie Streitfeld Diaz and CoAssisting with chat questions: Hosting:April Hunt, Nonprofit Webinars Sam Frank, Synthesis Partnership A Service Of: Sponsored by:
  5. 5. Promise and Peril Profit Making Ventures for Non-ProfitsMichael D. AaronsonCertified Public AccountantRichard StreitfeldCertified Public Accountant
  6. 6. To download a copy of the outline for this talk click here
  7. 7. Considering a for-profit venture? Why?
  8. 8. What is your reason for consideringa 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?
  9. 9. Both are valid... But clarity on your goals is critical at the outset because your choice drives the structure of the venture.
  10. 10. Contrary to popular belief... Non-profits have wide latitude in establishing for-profit ventures, even if it is seen as having an unfair advantage.
  11. 11. However... The non-profit may be subject to normal corporate taxes for an unrelated venture.
  12. 12. No matter what, you’ve got to have a Plan.
  13. 13. 50% of all businesses fail,and you have the additional concernof making sure the core mission and financial stability of the non-profit itself is not threatened.
  14. 14. A rigorous business plan, just as if youwere an individual planning to open arestaurant, is necessary.The board and key management playersneed to achieve consensus beforelaunch.
  15. 15. Who is your competition? How will theyreact? Say you are starting a coffee shoprun by adults with disabilities. Will thepopular venue down the street takeumbrage and protest that you have anunfair advantage? Will they claim thatin the press, or will the press besympathetic to your cause?
  16. 16. What is your budget...month to month,several years out?This is key!
  17. 17. Do worst case and best case scenarios.How much money do you need to startand where will you get it?How long will it take to break even?Can it be self-sustaining?
  18. 18. How deep are the sponsoring organization’spockets and how much will it commit to?How will you market the new venture?Will staff be tempted to leave your existingorganization if the new venture has betterpay and benefits?
  19. 19. Forms of OrganizationExamples...
  20. 20. Non-profit starts a related for-profit venturewithin its own structure.
  21. 21. For instance... A vocational school starts a catering business as a training program.
  22. 22. Non-profit starts an unrelated for-profit venturewithin its own structure, and will be subject to Unrelated Business Income Tax (UBIT) rules.
  23. 23. For instance... A museum starts a restaurant, open to the public even when museum is closed, and with several additional locations around town.
  24. 24. The non-profit starts a related for-profit venture,owned by the non-profit, but keeps it separate for legal and operational reasons.
  25. 25. For instance... A Community Development Corporation establishes a Rental Management Company.
  26. 26. The non-profit forms and owns an external,unrelated venture, solely to generate funds for its core mission.
  27. 27. For instance... A food bank starts a walk-in passport office solely to generate funds for its core mission.
  28. 28. Advantages andDisadvantages of the Different Structures
  29. 29. 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
  30. 30. Separated: non-profit owns or is linked to thefor-profit but the for-profit is a separate entity... 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 Cons Higher costs for additional structure A potential for activities to drift so far from the organization’s mission, that the public is confused
  31. 31. UBITUnrelated Business Income Tax
  32. 32. For non-profits with“unrelated activities” 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.
  33. 33. There are new structures and designations, likeL3C Low-profit Limited Liability Companies. 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.
  34. 34. Thank you for joining in Aaronson Lavoie Streitfeld Diaz and Co  Certified Public Accountants 1604 Broad Street Cranston, Rhode Island 02905   phone: 401 223 0205 web: email: or Created by Rebel Headquarters
  35. 35. Find listings for our current season of webinars and register at: NonprofitWebinars.comA Service Of: Sponsored by: