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Profit Making Ventures For Non-Profits: Promise and Peril

Profit Making Ventures For Non-Profits: Promise and Peril

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Published by: RichCPA on Oct 22, 2011
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Promise and Peril

Profit Making Ventures for Non-Profits
Michael D. Aaronson
Certified Public Accountant

Richard Streitfeld
Certified Public Accountant

To download a copy of the outline for this talk click here

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.


The non-profit may be subject to normal corporate taxes for an unrelated venture.

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?


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


one organization...

Lower cost One structure and board No public confusion of purpose Unified management

Separate records for unrelated business income tax Board unfamiliarity with a for-profit Deficit may drain the non-profit


non-profit owns or is linked to the for-profit but the for-profit is a separate entity...

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

Higher costs for additional structure A potential for activities to drift so far from the organization’s mission, that the public is confused

Unrelated Business Income Tax


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.

There are new structures and designations, like

L3C 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.

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: alscpa.com email: rich@alscpa.com or michael@alscpa.com

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