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.

1. Structuring Nonprofit Businesses:
Hybrid, Subsidiaries, Joint Ventures, and Other Options
Brian Howe
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3. Today’s Speaker
Brian Howe
Attorney,
Vox Legal, PLLC
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4. Structural Options for
Nonprofits Running
Businesses
Brian Howe
Attorney, Vox Legal

5. Guiding Principle:
Implement best legal
structure to support the
mission, not the other
way around.
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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

13. Option #4: Create a Contract Hybrid
Independent
For-Profit
Contracts Non-Profit

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

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707-812-1234
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