Can a charitable nonprofit be profit-making and sustainable without donations?
It is a common misconception that “nonprofit organization” and “profit-making” are mutually exclusive concepts. It’s certainly possible from a legal perspective for a charitable nonprofit to generate profits if the profit-making activities are related to furthering a valid charitable purpose. And by related, we mean that the activities themselves would be considered charitable even if they did not result in any profits.
Examples of charitable activities: providing health care and educational services for fee, often at substantially below cost (e.g., nonprofit hospitals and universities) and selling products that are directly related to furthering a charitable purpose (e.g., reproductions of art at an art museum).
Examples of non-charitable activities: providing commercial services for fee and selling products in competition with, and in a similar manner to, for-profit entities (even if you use the profits to fund charitable activities).
The issue of whether your profit-making activities are charitable or not is often best assessed by an attorney who really understands the applicable nonprofit and exempt organizations laws. And depending on the answer, you may need to reconsider the form of legal entity (nonprofit vs. for-profit) and maybe even an affiliate structure (nonprofit AND for-profit). Remember: form should follow function.
If the activities are charitable, the next question is whether it’s possible and advantageous to operate sustainably as a charitable nonprofit subject to all of the associated legal constraints (e.g., no equity investors, no private inurement, no private benefit). Having an early understanding of these limitations is key to informing the ultimate decision on form and subsequent development of the business plan. And consulting with a nonprofit attorney at the outset can help assure sound decision-making and planning that provide the venture with the best opportunity for success.
If the profit-making activities are not charitable, there is an additional major constraint with operating as a charitable nonprofit: the profit-making activities must not be substantial in relation to the other charitable activities. Furthermore, the profits made from such activities will likely be subject to unrelated business income taxes, absent an applicable exception or exclusion.
This is Part Two of our five-part series this month on starting a nonprofit.
Part Three – Incubating a Nonprofit Social Enterprise
Part Four – 10 Keys to Starting a Nonprofit – Private Foundation
Part Five – Nonprofit Startups and the Value of a Nonprofit Attorney