Can a Non-Profit Also Have a For-Profit Division?

By Chris Blank

Many nonprofit organizations find it difficult to generate sufficient funding to maintain their operations. Especially with the ongoing challenges associated with the global financial crisis, generating revenue is a constant struggle. One strategy nonprofit agencies may employ to generate additional income is through one or more for-profit ventures associated with the nonprofit organization. While this arrangement is possible, both the law and federal tax code place limits on how nonprofit organizations are allowed to coordinate with for-profit enterprises.

Nonprofit Versus For-Profit

The purposes for establishing and maintaining nonprofit organizations and for-profit businesses differ significantly. The main purpose of a for-profit company is to produce income above and beyond expenses; the products or services provided by the company are a means to that end. On the other hand, nonprofit organizations exist to provide a service for a target community or the public at large. The nonprofit must either collect income through donations or membership fees or generate funds through fees charged for direct services provided to clients.

Program-Related Investments

Unlike for-profit companies, nonprofit organizations do not distribute dividends to stockholders. Instead, nonprofits reinvest earnings above and beyond their operating expenses into expanding services within their own organizations, funding other nonprofit ventures or generating revenues through Program Related Investments – purchases at below-market rates of financial instruments in for-profit companies that are related to the nonprofit organization’s stated mission. Some nonprofit corporations form their own limited liability companies, or LLCs, through which they make PRIs.

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Collaborative Nonprofit and For-Profit Enterprises

Nonprofit organizations often work collaboratively with for-profit companies in one of two ways. In one scenario, the nonprofit company controls at least 51 percent of the operations of the for-profit company, with a significant overlap in managing officers, staff and other strategic personnel. In the second scenario, the nonprofit organization and for-profit company operate independently, but interact through one or more contracts negotiated at arms' length and beneficial to the operations of both the nonprofit organization and the for-profit company.

Low-Profit, Limited Liability Companies

A handful of states and independent Native American enclaves recognize legal structures known as low-profit, limited liability companies or L3Cs. Like conventional LLCs, L3Cs may be owned by a variety of entities ranging from individuals to corporations and other L3Cs. A primary function of an L3C is to attract donations from private foundations, which must distribute a portion of their annual earnings to charitable purposes or risk incurring tax penalties from the Internal Revenue Service. L3Cs may also generate their own profits, although generating income must remain secondary to the purpose of providing a charitable or educational service.

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Foundation Vs. 501(c)(4)



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501(c)(3) Types

Federal taxes are a significant expense for many businesses, but not for exempt non-profits. Non-profit charities that are organized under Internal Revenue Code Section 501(c)(3) are generally tax-exempt, and their donors usually get tax breaks for supporting them. The IRS divides these charities into two categories: public charities and private foundations.

What Are the Benefits of a 501(c)(7) Tax-exempt Club?

Having fun with friends doesn’t necessarily have to generate a tax bill. Section 501(c)(7) of the Internal Revenue Code grants tax-exempt status to some clubs organized as not-for-profit entities and operated for the enjoyment or recreation of their members. These can include fraternities and sororities, country clubs, dinner clubs, amateur sport clubs, yacht clubs and hobby clubs. The chief benefit for a 501(c)(7) tax-exempt club is that it does not pay federal taxes on its day-to-day activities, but there are other advantages as well to the club having tax-exempt status.

What Is the Purpose of an LLC?

The purpose of an LLC is to allow one or more people to operate a business and have liability protection along with certain tax advantages. Another purpose of an LLC is to give business owners an entity that is flexible and easy to maintain, while requiring fewer formalities than other business entities, such as corporations.

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