Non-profit, For-profit Ventures
Today’s social enterprise often combines elements of for-profit and non-profit ventures. In addition to commercial activities, the enterprise may conduct or finance charitable activities designed to have a positive impact on society or the environment. Most of its activities will probably be expected to generate profits, but some will be designed or intended to generate social impact or to benefit stakeholders rather than shareholders. In fields like health care, education, media, and technology, the ability to deploy both invested and philanthropic capital and to generate earned and donated revenues simultaneously can be a huge advantage.
Unfortunately, U.S. law does not currently permit a single entity to accept tax-deductible donations (charitable contributions and grants); invested capital (equity investment for which investors seek a market return); and quasi-invested capital (such as program-related investments from foundations that are structured as investments but are made primarily to further mission rather than to generate a financial return.) Charities can issue debt but not equity, while businesses can issue equity but cannot take tax-deductible contributions, at least not directly. As a result, social entrepreneurs are often forced to choose between for-profit and nonprofit legal structures in ways that compromise their social vision, restrict their ability to finance and operate their ventures, and ultimately make it harder to meet their own needs as well as those of their investors, customers, employees, and other stakeholders.
Hybrid Structures for Nonprofit and For-profit Business Models
To address this dilemma, Bromberger Law has pioneered the use of “tandem” hybrid structures. Tandem structures combine nonprofit and for-profit entities through legal arrangements that bind them together, using governance structures or contracts that enable them to operate with a high degree of cooperation and coordination.
Parent/Subsidiary
The simplest type of tandem structure is the parent/subsidiary arrangement. This can be a non-profit subsidiary of a business (i.e., a corporate foundation), or a for-profit subsidiary of a charity (i.e., a museum parking garage.) The key feature is that one of the entities owns or controls the other. They are not equals, and generally, their operations and finances are kept separate. This is by far the most common and simplest type of hybrid arrangement.
Joint Venture
Another common type of tandem structure is the joint venture, where two or more partners create a new, third entity to operate a venture. The partners share the risks and rewards of that venture but are otherwise separate and independent of each other. Joint ventures are especially useful when two established entities come together to conduct some joint activity that serves their mutual interests. They are very common in health care and education, for example. However, because of special IRS rules on the financing and governance of joint ventures involving charities, there are many situations where a joint venture has to be structured in a way that is less than ideal or will not work. In those situations, we use a “contract” hybrid.
“Contract Hybrid”
A contract hybrid ties two or more entities together with a specialized agreement that regulates their interactions, allocates costs and resources in accordance with IRS rules, and provides for shared decision-making and dispute resolution. These agreements can also provide for stakeholder participation, can obligate the parties to operate according to certain principles or values, and can include other legal obligations that the parties find necessary or useful. A recent innovation involves using a “management” company to coordinate and manage the hybrid under contract to the partners, which is more work to set up but eliminates many problems that might otherwise occur as the venture develops.
Our Approach to Hybrid Structures
Hybrids can be complicated to create and maintain, and they don’t work in all situations. In situations where a nonprofit or a business can accomplish its goals without the need for a hybrid legal structure (for example, where a business can accomplish its social goals by making donations, or a charity can establish a business venture using a subsidiary that does not require outside investors), those approaches may be preferable.
At Bromberger Law, we work closely with our clients to understand their business plans and provide advice regarding the best structure to accomplish their goals – whether that is a single entity or a hybrid structure. We then help our clients through the process of setting up their social enterprise by forming nonprofit corporations, benefit corporations, LLCs, and other business entities. We provide advice on governance matters, prepare the necessary contracts to document the relationships between the entities in a hybrid structure and provide ongoing advice regarding financing and operations.
FAQs
A nonprofit can form a subsidiary for-profit company
What is a for-profit not-for-profit joint venture? ›
For nonprofits, “joint venture” involves a contractual arrangement with another nonprofit, a for-profit entity or a governmental agency. The two entities become engaged in a solitary enterprise without incorporating or forming a legal partnership.
What is a for-profit venture? ›
For-profit forms include proprietorships, partnerships, corporations, limited liability companies, and cooperatives. 2. Explicitly designed to serve a social purpose while making a profit.
Can a non-profit have a for-profit subsidiary? ›
A nonprofit may also create a for-profit subsidiary in order to avoid possible risk and liability that might be directed at the original organization if the activities were carried out under its tax-exempt status.
What is the difference between a nonprofit and a for-profit business? ›
The Difference Between a Nonprofit and For-Profit: Organizational Motive. While for-profit companies exist for the purpose of—you guessed it—making a profit, nonprofit organizations exist to maintain assets in order to continue providing and expanding services that support their mission.
Can a founder of a non profit get paid? ›
It is legal for nonprofit founders and officers to receive a salary for their work for the nonprofit. Let's talk about how much you can pay yourself.
Can a nonprofit merge with a for-profit? ›
Another form of business combination involves the acquisition or sale of assets of an entity. This might be in the form of a nonprofit acquiring the assets of another nonprofit or a for-profit. Alternatively, the transaction might involve a for-profit acquiring the assets of a nonprofit.
What qualifies as a not-for-profit? ›
What is a not-for-profit organization? Similar to a nonprofit, a not-for-profit organization (NFPO) is one that does not earn profit for its owners. All money earned through pursuing business activities or through donations goes right back into running the organization.
How do not-for-profits make money? ›
While many nonprofits put a great deal of emphasis on donations and fundraising initiatives, these organizations often also make money through earned income. They self-generate funds to contribute to their budget and help the organization stay afloat.
What is a venture nonprofit? ›
Venture philanthropy is the nonprofit sector's version of venture capital, in which unrestricted grants, strategic support, and other resources are mobilized over multiple years to catalyze visionary social entrepreneurs, organizations, and initiatives that can break through and impact the lives of millions of people.
Primarily, the leaders in the nonprofit may decide they wish to engage in business activities that don't pertain to the mission of the nonprofit. Setting up a separate for-profit helps the leaders avoid paying Unrelated Business Income Tax Income (UBIT).
What is a disadvantage of a nonprofit owning a for-profit subsidiary? ›
The main disadvantage is that resources, personnel, and administrative expense must be doubled to run two separate entities. Maintaining entity separation is crucial because failing to do so could lead to attribution of non-exempt activities to the nonprofit.
What happens when a nonprofit makes too much money? ›
Example: If a nonprofit is experiencing a sudden windfall of cash, creating an endowment can set the organization up for long-term success while the cash is available to do so. This endowment can then be pitched to new and existing donors as a way to build a legacy of charitable giving through the foundation.
Should I start a nonprofit or for-profit? ›
Start by asking yourself about your goals for your business. Is your main to make money? Then you should start a for-profit business. But if you want your business to donate profits and services to the public, consider starting a nonprofit business.
Can you have a profit and nonprofit organization? ›
So while a for-profit business can't own a nonprofit, they can establish one or partner with one in a way that gives them not only recognition for doing so, but operational control over the nonprofit as well.
What kind of business can be a nonprofit? ›
The most common types of nonprofit corporations established in California are public benefit corporations, mutual benefit corporations, and religious corporations.
Can a nonprofit be a joint venture? ›
In truth, such joint venturing is not only permissible, but can be highly effective in helping nonprofits advance their missions. It is important, however, to make sure that the joint venture agreement is advantageous for the nonprofit and the community it serves.
What qualifies as a not for-profit? ›
What is a not-for-profit organization? Similar to a nonprofit, a not-for-profit organization (NFPO) is one that does not earn profit for its owners. All money earned through pursuing business activities or through donations goes right back into running the organization.
What are for-profit and not for-profit entities? ›
Since for-profit companies make profits for their own benefits, they have to pay taxes as required by the law. However, nonprofit organizations are exempted from paying taxes as they make profits to help society. In addition, individuals and businesses that donate to nonprofits can claim tax deductions.
How do non profits and for profits work together? ›
For-profit organizations might be able to provide volunteers for nonprofit causes and operations. This volunteering approach might foster more employee engagement and productivity within a for-profit organization, making them feel more connected and inspired by the work of the organization.
