Q: I am on the board of a nonprofit organization specializing in the placement of assistance dogs, matching them to people with multiple disabilities. Currently we breed, train and place our dogs, as well as provide lifetime follow-up and support, at no cost to carefully vetted recipients. The process requires a great deal of time and expertise.
Recently, we’ve been approached to provide our training services to dog owners who wish to turn their personal pets into service animals. This is a costly proposition. We cannot even consider offering this service to the public without being able to charge for it. The question is, can we charge people who may have a genuine need for a service dog but who are not our clients or for some reason are not client-eligible? We don’t want to risk jeopardizing our nonprofit status.
I believe from what I have read, that this should not be a problem as long as the fee that we charge the public is below market value and that any “profits” we make support our organization’s primary mission. Is this true?
A: There are actually several approaches you could take to accomplish your goal. I will share two.
The first would have you working within your current nonprofit model, just charging a fee for the services you provide. “Fee for service” is a revenue model that has been around for a long time. More and more organizations are turning to it today as a means of sustainability, charging even their traditional clients. In this case, you have non-traditional clients knocking on your door. These are people who may not have the multiple disabilities your traditional clients do, but whose reason for desiring a service animal is similar to that of your traditional clients. You can’t handle them without additional revenue. It’s perfectly legitimate to charge them for the services they are requesting but are not eligible for under your current guidelines.
There are a few things you should consider when adopting a fee for service model:
1. What will offering this service cost you. Be sure to include more than paying the salaries of additional trainers. If yours is a residential program, will you need to add kennels and buy more dog food? Will you need to adopt invoicing software and hire someone to handle the billing? Will you incur additional liability, requiring more or even different kinds of insurance? Then, of course, there are the non-financial costs. What will your clients and funders say if they feel you are taking attention away from your primary stakeholders?
2. What does the marketplace look like? While people have approached you to provide this service, are others doing this work within a reasonable proximity? If so, what services do they and don’t they offer? How much do they charge? Are they also nonprofit or are they for-profit? What is the fair market value of your services? Can you stay under that level and still at least break even?
3. Will you have to be concerned with Unrelated Business Income Tax (UBIT)? In your case I doubt it, since this offering is so directly related to your mission. But I encourage you to check with your tax advisor to be sure. As I’ve said in this column many times, paying tax on income earned is not necessarily a bad thing – it means you made money. Still, if you are liable for this tax, at a minimum it will require additional accounting services.
4. How will you charge? Will it be a flat fee for everyone? Will you offer a sliding scale based on what someone can afford? If you do that, will you require proof of income or take someone at his/her word? Will you make payment voluntary? If the latter, how will you encourage donations significant enough to cover your costs? (If you go the “voluntary” route, any donations must truly be voluntary – they cannot be even subtly “coerced.”) Should you require a minimum payment and then request donations on top of that?
5. Will inviting non-multiply disabled clients or charging them to participate violate the terms of any grants you may have received from funders of your mission-based program? If so, in what way? Is the potential return worth the potential loss of these grants?
6. What policies do you need to put into place? Will you only agree to train those breeds that have been determined to make good service dogs? Must a pet owner show proof of need from a doctor? Or, will you require the owner to commit to attending all training sessions or step down from the program?
7. Do you need to amend your articles of incorporation with the IRS so that it has record of your new two-tiered client base and revenue model?
I mentioned two approaches you might take in moving this concept forward. The second is the adoption of a social enterprise model. This would allow you to accomplish what you want by adopting one of the hybrid structures that have been gaining popularity in recent years. For instance, you might go the route of a nonprofit that has a wholly owned for-profit business subsidiary.
If this is of interest there are other things to consider:
1. Is this hybrid model legal in the state in which you are incorporated? Not all states allow the full gamut of social enterprise models, though this one is more common than some of the others.
2. Do you have an attorney that has worked with setting up this structure? It can be complex and you don’t want to go it alone or with a novice.
3. Do you have a way to keep the resources for both organizations separate and accounted for? The IRS will insist on that!
4. Will you require two boards? Can there be any individuals that serve on both?
Good luck however you choose to proceed.