How to Start a Nonprofit and Business Organization: Strategies and Legal Considerations

Starting a nonprofit and a business organization is a multifaceted endeavor that requires careful planning and understanding of legal structures. This article explores the various methods and considerations to effectively establish an organization that combines both non-profit and business aspects. Whether you're looking to launch a consumer cooperative, a 501c3 exempt organization, or a for-profit nonprofit partnership, this guide provides the necessary insights.

Defining the Mission and Purpose

The journey begins with a clear and compelling mission and purpose. Define what your organization aims to achieve and the problem it intends to solve. This clarity is crucial for attracting funding, aligning the board of directors, and crafting a marketing strategy.

Choosing the Legal Structure

There are several legal structures you can adopt for your organization. Each has its own advantages and challenges.

Nonprofit Business

A cooperative or co-op is a common structure for a nonprofit business. A non-stock membership-based corporation is the common legal structure, similar to the Seattle-based Recreational Equipment Inc. (REI). While this setup offers different ownership and governance structures, it does not confer any tax benefits.

501c3 Exempt Organization

To start an exempt organization that operates like a business, generating revenue rather than relying on donations, consider a 501c3 organization. A good example is the Social Good Fund, a Donor Advised Fund manager supported by fees from the funds it manages. However, it's important to note that the revenue-generating activities must be related to the charitable mission or it can risk Unrelated Business Taxable Income (UBTI).

Evaluation of UBTI and Related Business Income

Activity is considered an unrelated business and subject to unrelated business income tax (UBIT) if it meets three requirements:

It is a trade or business It is regularly carried on It is not substantially related to furthering the exempt purpose of the organization

Non-compliance with these requirements can result in punitive tax treatment and, if UBIT makes up a significant portion of the organization's revenue, it can result in the loss of the organization's exempt status.

Strategies for Combining Nonprofit and Business Elements

To navigate the complexities of combining non-profit and business elements, consider the following strategies:

501c3 and Related For-Profit Company

The IRS is highly scrutinizing the establishment of a 501c3 organization and related for-profit company. Examples include Network For Good and Network For Good Inc., where the for-profit entity is intended to manage Donor Advised Funds while engaging in for-profit ambitions. Investor success in such ventures is rare, and many non-profits would be better off remaining completely non-profit.

For-Profit Business Owning a Non-profit

Another strategy involves a for-profit entity owning a non-profit. In the case of IKEA, the IKEA Foundation wholly owns most of the stores, ensuring that profits are distributed towards philanthropic purposes. This structure provides no tax benefits to the for-profit entity but does ensure that profits align with the organization's charitable goals.

For-Profit Company Creating a Private Foundation

A for-profit company can also create a private foundation, endowing it with equity or donating a portion of its profits. Deductibility of corporate philanthropy to its own foundation is limited to 10% of its profits, with up to 5 years of carry-over for excess contributions.

For-Profit Business Partnering with Non-profits

For-profit businesses can partner with non-profits to achieve mutual goals. This route allows organizations like Uncommon Charity to leverage the Social Good Fund to manage Donor Advised Funds, aligning business activities with charitable objectives.

Starting an organization that combines nonprofit and business elements requires a comprehensive strategy and meticulous planning. By understanding the various legal structures, evaluating UBTI, and considering the right combination of strategies, you can successfully launch and sustain your organization.