Nonprofits are increasingly looking to create for profit sister companies to accomplish their goals of social change. In this seminar, we will lay out both the seven key strategy questions every social enterprise and nonprofit should consider when setting up a for profit arm. We’ll also go through a seven step legal and accounting check list your organization should work through as you actually set up your subsidiary organization. This seminar pairs up Rich Tafel, the Managing Director of Raffa Social Capital Advisors who works primarily with impact investors and for profit ventures with Aaron Fox Raffa’s Senior Tax Manager who has helped hundreds of nonprofits navigate the accounting and legal issues.

1. Thrive. Grow. Achieve.
Creating a
Hybrid Entity
Aaron Fox, Rich Tafel
November 29, 2017

2. ABOUT AARON FOX AND RICH TAFEL
2
AARON FOX
SENIOR TAX MANAGER AT RAFFA P.C
RICH TAFEL
LEADS RAFFA SOCIAL CAPITAL ADVISORS
MATCHES INVESTORS AND SOCIAL VENTURES

3. TWO BUCKETS TO COLLECT THE RAIN
“You can best accomplish your mission if you can say ‘yes’ to
both an impact investor and traditional non-profit funder.
Non-profits and for profits are legal structures created by the
IRS that have trapped social ventures into thinking they must
be one or the other.
Start with your impact goal and find the best organizational
models to achieve that goal.”
Creating a Hybrid Entity 3

4. FOUR BENEFITS
THERE ARE FOUR REASONS TO HAVE BOTH A NONPROFIT
AND FOR-PROFIT ORGANIZATIONAL STRUCTURE
1. SAY YES TO FUNDERS: PHILANTHROPIC FUNDERS CAN BE
DONORS AND IMPACT INVESTORS
2. SUSTAINABILITY: TWO STREAMS OF INCOME MAKE YOUR
MISSION MORE SUSTAINABLE.
3. EQUITY: THE CHANCE TO OWN A PORTION OF YOUR
CAUSE.
4. APPROPRIATE COMPENSATION: EMPLOYEES AND
MANAGEMENT WILL BE TREATED APPROPRIATELY
Creating a Hybrid Entity 4

5. CARA: A CASE STUDY
CARA OFFERS BEST-IN-CLASS JOB TRAINING AND PLACEMENT
PROVIDER FOR INDIVIDUALS AFFECTED BY HOMELESSNESS AND
POVERTY, WITH A MISSION TO BE A VEHICLE FOR TRUE LIFE
TRANSFORMATION.
• CARA HAS PLACED MORE THAN 5,800 INDIVIDUALS INTO QUALITY, PERMANENT
EMPLOYMENT (AT ONE-YEAR JOB RETENTION RATES OF 70 %+),
• IN 2005, WITH THE ASSISTANCE OF A PUBLIC SERVICE FELLOWSHIP WITH
GOLDMAN SACHS, CARA DEVELOPED THEIR LLC FOR-PROFIT ARM, CLEANSLATE
• CLEANSLATE– A SOCIAL ENTERPRISE THAT FOCUSES ON LANDSCAPING AND
MAINTENANCE OF BUSINESSES AND COMMUNITIES.
Creating a Hybrid Entity 5

6. TAX AND ACCOUNTING FIRST
CREATING A HYBRID ENTITY DOES TAKE MORE TIME AND
CAREFUL PREPARATION.
AARON M. FOX, SENIOR TAX MANAGER AT RAFFA P.C
“CONSIDERATIONS WHEN CREATING A FOR-PROFIT
SUBSIDIARY”
Creating a Hybrid Entity 6

7. 7 CONSIDERATIONS
1. STRUCTURE
A. C-Corp, Partnerships, S-Corp, LLC
B. Wholly owned, majority or minority owned
C. Board overlap, Sole member, Stock Ownership
2. CAPITALIZATION AND TRANSFERS
A. Loans vs. Grants
3. ATTRIBUTION
A. Sub should not act as an agent for the parent
B. Non overlapping board, not involved with day to day
Following these
steps can avoid
potential pitfalls
when creating a
for profit and
nonprofit
organization
arrangement.
Creating a Hybrid Entity 7

8. 7 CONSIDERATIONS
4. EXEMPT STATUS
A. Dividends, Stock Sales, Funds to parent (Grants deemed dividends)
5. COMPENSATION
A. Compensation must be deemed reasonable to officers, directors
B. Intermediate sanctions and private inurement
6. MINORITY OWNERSHIP
A. Fundraising and competition
B. Indirect ownership scrutiny
7. COST SHARING
A. Reimbursed fair value on actual basis
Creating a Hybrid Entity 8

9. AN INNOVATIVE 5 STEP STRATEGY
A WAY FOR NONPROFIT AND FOR PROFITS TO OPERATE UNDER ONE
UMBRELLA FOLLOWING THIS PROCESS:
1. FORM A SINGLE MEMBER LIMITED LIABILITY COMPANY (SMLLC)
WITH THE NONPROFIT ORGANIZATION (THE NPO) AS THE ONLY
(SINGLE) MEMBER.
2. COMPLETE THE FEDERAL FORM 8832 ENTITY ELECTION AND OPT
TO ANNUALLY FILE THE FEDERAL FORM 1120 AS A CORPORATION
3. COMPLETE THE FEDERAL FORM 1120 EACH YEAR AND PAY THE
TAX DUE AS A CORPORATION
4. PAY THE NET OR THE CASH FLOW OUT TO THE NPO AS A DIVIDEND
5. THE DIVIDEND IS NOT TAXABLE TO THE NPO
Raffa’s CEO, Tom
Raffa, pioneered a
creative solution to
make this
possible.
Creating a Hybrid Entity 9

10. THREE ADVANTAGES:
• IF YOU DON’T FILE THE ENTITY ELECTION, THE SMLLC IS TREATED
AS A DISREGARDED ENTITY AND ALL THE ACTIVITY IS REPORTED
ON THE NPO’S FEDERAL FORM 990. THE 990 IS A PUBLICLY
DISCLOSED DOCUMENT WHILE THE FEDERAL FORM 1120 IS NOT.
• IT IS THEN TAXED AT THE SAME CORPORATE RATES REPORTED ON
THE FEDERAL FORM 990T WHICH IS ALSO A PUBLICLY DISCLOSED
DOCUMENT.
• IF YOU OPT TO BE A CORPORATION, THE ONLY DISCLOSURE ON
THE 990 IS INFORMATIONAL ABOUT THE NPO OWNERSHIP OF THE C
CORPORATION AND NO FORM 990T IS REQUIRED TO BE FILED FOR
THE SMLLC.
Creating a Hybrid Entity 10

11. Page 11
THANK YOU!
Rich Tafel
E-mail: rtafel@raffa.com
Direct: 202-955-7299
Aaron Fox
E-mail: afox@raffa.com
Direct: 202-955-6701