Not for profit structure with a for profit wing?
January 14, 2012 1:35 PM   Subscribe

A friend of a friend is a painter in New York state involved in a project aimed at building parks aimed at improving communication between refugees and citizens. I have been asked how he might be able to organize an entity as a not-for-profit with a profit wing to encourage both private and public contributors. Anyone know of any standard ways of doing this?

I am involved in a nonprofit myself and have business experience but in a whole other jurisdiction and we are entirely self-funded. I have vaguely heard of Charity structures where some aspects of the fund-raising activities are managed by a commercial orgnanization but that is about the extent of it.

I would give you more information but I'm not sure whether they would want me to do that. All I can say from what I have seen is it's a beautiful concept involved with injecting reflective nature areas, free from all forms of technology and stress into city areas.

Many thanks in advance.
posted by vizsla to Society & Culture (11 answers total) 1 user marked this as a favorite
contracting out fundraising can be very problematic, because it requires large upfront costs and commissions which a charity may attempt to hide as "marketing and admin" or whatever. It might be that the project needs a better understanding of its value and sale propositions and how it will reward donors.
posted by parmanparman at 1:59 PM on January 14, 2012

Both private and public contributors both have lots of motivation to donate/invest in a fully nonprofit entity. If he is concerned that private corporations will not donate to charity, that is a problem with your mission and the way it is conveyed, not the structure of the organization.

There are some charity structures where some aspects of fundraising activities are managed by a commercial organization but I don't think you're referring to professional fundraisers - that is a huge mess. I think you're referring to earned income - that is, when there is a part of a nonprofit that creates a product or service (gift shop, speakers, etc.) and the nonprofit's activities/mission are funded by the proceeds of that earned income. It can be done but typically it starts as a for-profit enterprise, and all of the money earned goes right into the nonprofit's coffers. But you start the business part first. Then establish the 501(c)3 with the earned income business as its' main source of support, making it easier to establish the 501(c)3 with surefire income source.
posted by juniperesque at 2:09 PM on January 14, 2012 [1 favorite]

Thanks for the answers. Sounds like my understanding of the Charity structure is not the way to go. Will investigate further what's involved with 501(c)3 earned income.

I have also heard of Benefit Corporations, Low profit LLCs (L3C) and B-Corporations. Are they at all relevant or attractive to fundraisers? What are the key factors in deciding which way to go?
posted by vizsla at 2:18 PM on January 14, 2012

I can tell you that L3C's are both the "wave of the future" and "a terrible, terrible mistake" depending on who you ask. If I were to take a long view, I'd venture to say that trying something relatively new and with very little history of success is a mistake. YMMV.
posted by juniperesque at 2:25 PM on January 14, 2012

juniperesque : Hmm ok maybe best to stay away from them. Why is it easier to establish the 501(c)3 with a surefire income source? Is an income required to establish them? Thanks.
posted by vizsla at 2:31 PM on January 14, 2012

No income is required to establish a 501 (c) 3. This is a good New York-centric resource.

I don't understand what benefit having a for-profit adjunct would be. 501 (c) 3 corporations are allowed to conduct businesses like gift shops, selling t-shirts, etc.
posted by Sidhedevil at 2:44 PM on January 14, 2012

Also, let me recommend the Foundation Center as a great resource.
posted by Sidhedevil at 2:45 PM on January 14, 2012 [1 favorite]

The reason to form a not-for-profit is to encourage contributions from people who don't want their donations lining your pockets.

The reason to form a for-profit company is to line your pockets.

You do both of these things if you want to line your own pockets from some commercially viable venture while simultaneously attracting donations to do a similar activity but in a philanthropic fashion.

So, I might start a for-profit cheesecake company to make millions selling cheesecake platters for business meetings, and then I might start a not-for-profit company soliciting donations to give cheesecakes to homeless people.

In this case it might make sense if there are businesses who would invest in a profit-making venture that you think would benefit the cause, when they wouldn't be interested in a straight-up donation.
posted by emilyw at 3:11 PM on January 14, 2012

Sidhedevil : The benefit of the for-profit arm would be to attract private investment wishing to realize a return. I don't think it's to personally profit.

Could the "gift shop" arm of a 501(c)3 be managed by a commercial entity who get paid on a commission?
posted by vizsla at 5:30 PM on January 14, 2012

Jumping back in here:

I didn't mean that it was easier to get your 501(c)3 status with a surefire income source. I said that it was easier to establish your 501(c)3 with a surefire income service. That is, having a source of income right out of the gate allows a nonprofit to begin with some money in the coffers to use for programmatic expenses right away. Many nonprofits have an "angel" board member or foundation who will give early funds based on reputation or compelling mission alone.

Private investors wishing to realize a return aren't compatible with a 501(c)3. They cannot personally profit. That's called self-dealing. I cannot wrap my head around a structure which would allow a nonprofit to split and somehow have one arm which supports the mission of your nonprofit and another arm which lines someone's pockets, be it individual or corporate. A split like this would make your nonprofit more or less unfundable by both private (foundation, corporate, individual) support and public (government) support.

In theory a gift shop could be managed by a commercial entity who gets paid on commission, but the amount of money a nonprofit would be spending on outsourcing would painfully eat into income and lower your rating substantially on sites like Charity Navigator unless you are already huge with millions in revenue without the gift shop.

It sounds like a nonprofit isn't the way to go for this organization, based on your answers to our follow-up questions. If you're really interested in one, go talk to a lawyer that specializes in this stuff. They can set you straight.
posted by juniperesque at 7:09 AM on January 15, 2012 [1 favorite]

I worked at a for-profit company that was owned by a non-profit. The arrangement worked very well.

There's a long article in The Nation about for-profits owned by non-profits. I remember reading it at the time it was published in 1985 and thinking it was good, but that was seven years ago so YMMV. The article links to several other subscription-required articles on similar topics, so if it's worth it to you you could delve there.

Good luck with this!
posted by alms at 6:02 PM on January 15, 2012

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