When I mention that my work involves working with nonprofit organizations, many people often look confused and ask, "So how do they make money?" It's a rather common misconception that the term "nonprofit" equals "no profit". However, this is not the case at all. Nonprofits simply rely more on donors and their contributions rather than seeking their own profit. With these misconceptions, much less the IRS rules or dismal economic predictions, making a profit or being able to meet budget can be a challenge for many organizations. In recent years though, a change has come about that may be helpful to nonprofit organizations.
According to GuideStar, a nonprofit organization part of Philanthropic Research, in June of 2004, the IRS released a model for nonprofit organizations to show them how they could safely "enter into joint ventures with for-profit corporations without fear of losing their exemptions or being subjected to UBIT. It allows nonprofits to partner with for-profit entities on a limited basis, in furtherance of the nonprofits' tax-exempt purposes, while providing both organizations with an opportunity to establish stable revenue streams." With this model, it opens up many doors for fundraising.
This is an exciting opportunity which nonprofits should definitely further investigate. We are seeing that people need to become more and more creative in their fundraising approach as times change. However, the IRS has published seven limitations that nonprofit organizations do need to be aware of.
The activities conducted by the nonprofit through the LLC cannot constitute a substantial part of the nonprofit's activities. It must still primarily engage in a tax-exempt purpose. Any activities that the nonprofit participates in or conducts through the newly established LLC must be substantially related to the nonprofit's tax-exempt purposes and functions; otherwise, profits will be subject to UBIT. The nonprofit organization must maintain control sufficient to ensure the furtherance of its charitable purposes. Essentially the nonprofit should retain sole discretion over all decisions contributing importantly to its exempt purpose. Any and all contracts that the newly formed LLC enters into must be at arm's length and for fair market value. The LLC's governing documents should limit the nonprofit's participation to only those activities that will not jeopardize the organization's tax exemption. The ownership interests in the LLC must be proportional to the respective capital contributions, and all revenue generated by the LLC or capital returns must be distributed according to these proportional ownership interests. It is important that any disbursement be to the nonprofit entity and not to a private individual, which would constitute private inurnment and place that nonprofit in breach of its tax-exempt status. There should be a showing that the LLC is in furtherance of the nonprofit's charitable purpose and that this venture will expand the nonprofit's ability to accomplish that purpose. With this simple business model and a little creative thinking, nonprofits can develop a more sustainable flow of revenue in order to help their charitable purposes, in addition to their donors. For-profit corporations are excited about the opportunities. Many businesses would be glad to partner with a group to help in their charitable endeavors while generating revenue as well.
It's worth considering. However, you'll probably still have to answer that question about how a nonprofit makes profit... Just say you have the IRS on your side.
Information taken from GuideStar's article: True Sustainability: A New Model to Aid Nonprofits in Developing Self-Sustaining Revenue Streams
Jessica High is a Research Assistant at Christian Foundation Grants (www.christianfoundationgrants.com) which is subscription database of foundations that provide grants to faith based organizations. iDonate.com is a website (www.iDonate.com) that allows ministries to receive non cash gifts online.