On Nonprofits (c)

February 2011

 

Q:  A number of organizations, including several county Cooperative Extension Services, universities and ARC programs, have come together with a vision to develop a program to train people with disabilities in horticulture. The desired outcome is to create a skilled workforce in this field. To sustain the program, the intent is to sell the produce that is grown. My question is whether a nonprofit can create a business? If so, should the business be incorporated or kept under the umbrella of one of the nonprofit partners?

A: Many nonprofits create businesses. Sometimes the businesses are totally unrelated to the mission of the nonprofit and incorporated with the singular goal of generating profit to support the nonprofit. More typically, they are businesses that in some way further the nonprofit’s mission. Such businesses are often referred to as “mission based enterprises” or “social enterprises.” Since you are looking more toward the second category, you should understand that today, more than ever, there are a number of structures under which this can be done, depending on the states in which the nonprofit is incorporated. Your second question, however, is much more difficult to answer because there are many elements that impact the answer.

I turned to Dennis Haas, President/CEO of ARC Broward in Florida, to help craft this answer. Haas has a great deal of experience with collaborations and establishing and operating several “mission based enterprises” that make creative training and employment opportunities available to ARC Broward clientele. While he recognizes that you could incorporate as a separate business, he suggests you instead consider having the various agencies enter into a Joint Venture. Such a relationship would allow you to forgo the costs and complexities of establishing a new corporation, which would require applying for a new 501(c)3 exemption, if applicable, paying annual corporate filing fees, being responsible for audits and payroll taxes, and so on.  And it would not prohibit you from coming up with a unique name for the program if you desire, though that would entail filing for a fictitious name.

If you decide on such an approach, the collaborative partners must draft a Joint Venture Agreement outlining respective responsibilities, such as who will serve as the fiscal agent, who will house the program, who will handle day-to-day operations, and how governance, investments, insurance,shortfalls and surpluses, among other things, will be handled.  Typically, the start-up costs for any program like this will be high. Even if you get grants, they may not fully cover these costs. Knowing each partner’s responsibility for such costs ahead of time will minimize potential problems down the road. A related issue is the need for a well-thought-out budget. Don’t forget to include in that budget line items for marketing and sales as well as legal and accounting advice. It usually pays to have a facilitator that is experienced with forming collaborations lead you through the negotiation process. And, given the number of parties involved, Haas suggests this is one place where you might want to spend some of the money you’ve budgeted for legal guidance.

Another place to rely on the experience of a good nonprofit attorney and/or CPA is in ensuring that you do nothing to risk the exempt status of the organizations involved if you opt not to go the separate business route. However, as long as mission remains overriding, the nonprofit partners should be safe. Also, while it can take awhile to actually become self sustaining, you will need to understand unrelated business income issues if you begin to generate significant amounts of revenue from the venture. Of course, you will also have to determine if sales tax should be collected and paid on the items you sell.

It sounds like an exciting proposition. Hopefully, you will find the suggestions and caveats here helpful as you proceed. However, understand that they are based on the minimal information provided above and are, therefore, by no means inclusive of all the issues that you must eventually consider. Further, they should not be interpreted as legal advice.