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.

1. Profit-Making Ventures for Non-Profits:
Promise and Peril
Michael D. Aaronson & Richard Streitfeld
October 5, 2011
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4. Today’s Speakers
Michael Aaronson Rich Streitfeld
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Aaronson Lavoie Streitfeld Diaz and Co
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5. Promise
and Peril
Profit Making Ventures
for Non-Profits
Michael D. Aaronson
Certified Public Accountant
Richard Streitfeld
Certified Public Accountant

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

7. Considering a for-profit venture?
Why?

8. 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?

9. Both are valid...
But clarity on your goals is critical at the outset
because your choice drives the structure
of the venture.

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

12. No matter what, you’ve got to have a
Plan.

13. 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.

14. 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.

15. 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?

16. What is your budget...
month to month,
several years out?
This is key!

17. 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?

18. 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?

19. Forms of Organization
Examples...

20. Non-profit starts a related for-profit venture
within its own structure.

21. For instance...
A vocational school starts a
catering business as a training program.

22. Non-profit starts an unrelated for-profit venture
within its own structure,
and will be subject to
Unrelated Business Income Tax (UBIT) rules.

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. The non-profit starts a related for-profit venture,
owned by the non-profit,
but keeps it separate for legal
and operational reasons.

25. For instance...
A Community Development Corporation
establishes a Rental Management Company.

26. The non-profit forms and owns an external,
unrelated venture,
solely to generate funds for its core mission.

27. For instance...
A food bank starts a walk-in passport office
solely to generate funds for its core mission.

28. Advantages and
Disadvantages
of the Different Structures

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. Separated: non-profit owns or is linked to the
for-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. UBIT
Unrelated Business Income Tax

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. 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.

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