Mixing non-profit and for-profit activities
Somebody asked a question about forming two related entities, one for-profit and one nonprofit. The idea was that certain facilities that would be used by the nonprofit could be used in slack time by other businesses paying a market rate.
The business model seemed to be that there would be grants for the nonprofit, which would cover the minimum expenses for the facilities, thus leaving extra capacity available to a for-profit business. The question also suggested that investors would be interested in the for-profit business because it would be making money.
In this scenario, the questioner didn’t say that they wanted to make money from the for-profit side and keep it. They also didn’t say that they had a for-profit business and wanted their nonprofit to be a customer of their business. So two complications avoided!
The scenario described could be structured as either a single nonprofit or two entities. The biggest problem with two entities is handling the conflicts of interest between the founder as executive director deciding how much the founder as business owner have to pay to rent the facilities. There are a number of ways around that, but it’s not clear yet whether it’s worth the effort. Is it necessary to have the business rent the space from the nonprofit and then out to others, or could the rental of the facilities be a business function of the nonprofit? That’s also partly a question about unrelated business taxable income (UBTI), so it’s important to work through that specific question with a nonprofit tax expert under the laws in effect at the time.
Where I usually come out on overly complicated questions like these is to exercise good governance and simplify the plans. Start with the goals: what are the founders trying to accomplish? This isn’t the same flavor of strategy development and strategic plan development that I go through with board and CEOs and founders, but it’s the same process and the same tiered set of outcomes that yields the answers that work for that particular team.
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