Business Income
for Nonprofits
Tom Holland, Ph.D., Professor
UGA Institute for Nonprofit
Organizations
Bob Sleppy, M.B.A., Director
Nuci’s Space
Nonprofits receive income from
1. Individuals with particular interest in
the mission of this organization
2. Foundations and corporations
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Independent foundations
Corporations and corporate foundations
Community foundations
Operating foundations
3. Public Sources (federal, state, local)
4. Sales of products and services
National Average Income for
Nonprofits from all Sources
• Fees for products & services
• Public (government)
50% (growing)
30% (declining)
– grants & contracts for restricted purposes
• Private Contributions
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20%
individuals give about
foundations give about
corporations give about
bequests, wills, trusts, endowments
70% of that
10%
10%
10%
Importance of Diversification
• Over-dependence on any single approach
carries risks
– Reduced autonomy
– Goal displacement
– Volatility
• Multiple sources and approaches help
counteract those risks
• Rate of growth in earned income is greater than
in all other approaches (donations, grants)
Risks in Government, Foundation,
and Corporate Grants
• Vulnerable to changing interests
• Reductions in public support for most community
programs.
• Medicare and medicaid have seen rises, but many
politicians call for sharp reductions in these.
• Intense competition for all types of grants
• Grants support a specialized project rather than support
for whole organization
• Require extensive staff time and skills
• Pull organization toward compliance with grantmaker’s
interests, bureaucracy, lower autonomy, rather than
innovation and responsiveness to consumer needs.
Expansion of Businesses into
Nonprofit fields
• For-profits growing in health care, education,
prisons, adoptions, case management
• Raising capital for start-up costs is especially
difficult for nonprofits, due to non-distribution
constraint.
• Joint ventures: business and nonprofit
collaborate, share strengths
– Example: Lockheed and Urban Institute developing
programs for disorganized families
– Nonprofit must offer distinctive skills, such as
knowledge and experience in an area of consumer
need.
– Careful negotiations to protect each partner while
building on each other’s strengths
Many nonprofit bring in earned
income from
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Joint ventures or social enterprises
Membership dues
Program activity fees
Admission fees
Sales of products or services
– Gift shops
– Concessions
– Contracted services, such as training,
maintenance
– Uniforms, supplies, materials
Social Enterprises
harness the power of the marketplace to
solve critical social and environmental
problems
generate profits to support their nonprofit
missions
may be integrated into their service
programs or run as separate businesses
Examples
• Atlanta Justice Project operates a landscaping
business where clients are trained for
employment.
• Habitat for Humanity sells contributed building
materials for profit.
• Nonprofit in Brunswick prepares people for
employment. In addition to training classes, it
runs a for-profit café, where food service
trainees gain experience and skills.
• Another in employment preparation operates a
for-profit office cleaning business that makes
money and provides skill development
opportunities.
More examples
• BetterWorldBooks collects and sells books to
fund its literacy programs.
• Independent Transportation Network operates
van and taxi services for purpose of helping
people in outlying areas to get to health care
and shopping.
• Wisconsin Women’s Business Initiative operates
catering and bakery businesses for purpose of
making loans to women’s micro-enterprises. It
employs women to run its retail and loan
operations.
• Fair Trade imports and sells food products for
purpose of improving income for rural farmers in
developing countries.
Examples of Joint Ventures
• Nonprofit and business agree on contract that
business will hire trainees for entry level
positions while nonprofit continues with training.
• Company wants customers to buy and send in
boxtops from its product, agreeing to give
proceeds to nonprofit, which in turn publicizes
the opportunity.
• Dental association endorses a brand of
toothpaste and allows use of its logo on products
in return for contribution from the company.
A Continuum of Organizational Forms
• Pure nonprofit: all receipts from contributions for charitable services
• Nonprofit operating business conducting charitable activities:
nonprofit health or education organizations
• Nonprofit operates business in areas related to its mission:
university bookstores, job training programs
• Nonprofit in partnership with for-profit: cause related marketing,
corporate sponsorships
• Nonprofit with stake in a for-profit business: nonprofit owns shares
of for-profit affiliate
• Not-for-profit firm: Organization legally organized as private
business but distributes everything as wages
• For-profit business gives pre-announced shares to charity: Ben and
Jerry’s, Newman’s Own
• For-profit in direct competition with nonprofit: For profit hospitals,
education companies
• Pure for-profit business: No charitable outputs
Creative approaches
• Identify some aspects of your nonprofit that
could become income producing activity. Frame
that activity so it clearly advances the mission.
• If not clearly supporting mission, consider setting
up a separate, wholly-owned for-profit subsidiary
organization. IRS has rules for how to do this.
Does not jeopardize nonprofit’s tax exemption.
• Cause-related marketing: partner with a
business where nonprofit provides publicity and
recognition to business in exchange for
contributions to nonprofit. Company A does well
by helping charity B.
Tie activity to Mission
• After Girl Scouts began cookie sales, IRS
challenged the income as unrelated to
mission.
• Girl Scouts responded by re-framing
activity to be training opportunities for girls
to learn about running a small business.
Other possibilities
• Target the activity so it is not carried on
regularly, thus exempting income from
taxation.
• Structure the income in ways that are not
taxable to nonprofit, such as having the
venture put money into an endowment
fund for nonprofit, generating dividends or
interest income to nonprofit.
Advantages of Earned Income
• Less vulnerable to changing public attitudes and
interests
• Fits with cultural assumption of paying for what
you get
• Greater control over activities
• Greater predictability of income
• Fewer restrictions on use of income
• Better support for whole organization, autonomy
• Promotes responsiveness, innovation,
accountability
• Clearer advancement of mission, reduced risk of
mission-drift
Risks from Earned Income
• Is enterprise closely and clearly related to and
supportive of organization’s mission?
• If not tied clearly to mission, activities can come
to displace mission, esp. in organizations
serving the poor.
• Public image and trust: are profits more
important than mission?
• Enterprise runs risk of losing money
• How extensively should nonprofit operate like a
business? Mission vs. market challenges
Public Perceptions
• Popular assumptions that most businesses are
efficient and responsive to consumer demands.
• But, businesses seen by some as shirking
community citizenship, dampening altruism.
• Nonprofits often seen as inefficient, often
unresponsive, self-serving more than
consumers.
• Government programs also distrusted.
• Planning any social enterprise must take such
perceptions into account.
Partnerships between Nonprofits
and Businesses
• Sometimes called joint ventures or “causerelated marketing”
• Offers a service that benefits both partners as
well as consumers
• Examples
– Bookseller sponsors a literacy nonprofit’s reading
project in return for publicity
– Restaurant offers % of profit from an evening’s
dinners to hunger project
– Nonprofit trains entry level staff for local businesses
Benefits of Partnerships
Nonprofit gains
Financial support
Public credibility
Business expertise
Business gains
Favorable public image
Increased sales
Staff engagement and loyalty
Extended staff skills
Risks
For either: failure by other to fulfill promises
For nonprofit
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Potential exploitation (nonprofit usually weaker)
Compromised integrity of mission
Diminished public trust
Unexpected discontinuation
For business
– Negative publicity about nonprofit
– Stockholder disapproval
Mitigate risks by written contract
• Clearly state the purpose of the joint activity
• Specify the activities to be carried out by each
partner, when, by whom, with what $
• Identify exclusions: what will not be allowed or
done
• Structure: how activity will be organized,
controlled
• Accountability: how records will be kept about
time, income, expenses, division of income
between organizations
Guidelines for forming partnerships:
both partners should
• Already have excellent community reputations
• Identify mutually acceptable options to meet agreed
upon goals
• Offer and be known for high quality programs, services
and staff
• Define the specific areas for collaboration
• Make expectations both ways clear and documented.
• Set out conditions for assessing, continuing and
terminating partnership
• Prepare business plan
• Secure the resources needed to implement project
Nonprofit should ensure that
• The project directly furthers its mission
• Agreement allows nonprofit to act on its
mission independently of joint venture
• It can block venture activities that
jeopardize its tax-exempt status
• It has legal counsel to draw up
agreement
Filing Requirements for Nonprofits
• Federal and state recognition as 501c3.
• Annual financial reports on IRS form 990
sent to IRS and state
• Annual submission of form for state
recognition and for state tax-exempt
recognition
• State registration for charitable
solicitations (Ga. form C-100)
I.R.S. distinguishes related vs.
unrelated business income
• Nonprofits can generate income as part of programs,
through separate for-profit companies, or joint ventures
with businesses.
• IRS distinguishes income as either
– Related to mission, hence non-taxed
– Unrelated to mission, hence taxed
– See IRS publication # 598 for specific rules.
• Examples
– Job training center contracts with local businesses for building
maintenance
– College sponsors international tours
• Tests for mission-related business income
– Is the business clearly related to the organization’s mission?
– Would the nonprofit continue the business if it did not make
profit?
IRS has 3 part test for taxability
of organizational income
• 1. Activity operates as a business
• 2. Activity is carried out regularly
• 3. Activity is not substantially
related to the nonprofit’s taxexempt purpose/ mission.
IRS rules about business income
for nonprofits
• To be exempt, the activity must be directly and
substantively contribute to carrying out mission and
purposes. If not, n.p. may lose its tax-exempt status.
(See www.stayexempt.org and www.irs.gov)
• “It’s making money for our organization” does not qualify.
• May be structured as an unrelated business activity,
making income from it taxable, but after-tax gains go to
nonprofit without another tax (see IRS regulations about
Unrelated Business Income Tax)
• Why is business income taxed? Gives nonprofit unfair
advantage over similar for-profit company offering same
service/product.
• Paying U.B.I.T. does not jeopardize nonprofit’s 501c3
status.
State Taxes
• Nonprofits are exempt from federal and
state income taxes, as specified by state
laws.
– Exception: unrelated business income taxes
– Must apply for state corporate income tax
exemption
• Nonprofits are not exempt from payroll,
employment tax withholdings.
• They are not exempt from collecting state
sales taxes on business income.
Any income producing project
requires a Business Plan
• Description of the venture, including primary features,
advantages, benefits
• What the organization plans to do with it
• Justification that the plan is credible, including supportive
research
• Strategic goals and justifications
• Market analysis
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Who the users are
Benefits they see from the venture
How and why will they will use it
Likely demand for our product or service
What users are willing to do and pay to get it
How will competitors react
How the venture will be promoted
More on basics of a business plan
• Staffing plan, including the expertise needed to
create and then operate the venture
• Management plans: how the expert staff will be
organized, coordinated, led, paid
• Financial plan: costs to establish the venture,
operate it, budgets for first several years,
expected amounts and sources of revenues,
when it will break even and then return profits
• Analysis of current organization, its resources
and programs, staff expertise, & how present
situation will contribute to success of new
venture
More on business costs
• What will be our costs in hiring, paying,
training staff? In obtaining office space
and utilities?
• If selling a company’s product or service,
must we purchase it first? Inventory
costs? Return costs? How will shipping
and handling be paid?
• If on consignment, any restrictions or
penalties on returns?
Questions before beginning
• Do we have a realistic, persuasive
business plan that will lead to net profits?
• Do we have the competencies to run a
successful business?
• Will the time and effort be worth the
income produced?
• How will we ensure that the project will
support and not restrict or interfere with
our mission?
More Questions
• Are there competitors for our planned products
or services? How will they react?
• Why would the public buy from us rather than
those competitors?
• How will we persuade our contributors and the
public of the need for our project?
• How will we protect our organization’s
reputation, esp. if the project is not successful?
• What will we do if costs begin to exceed
income?
Summary
• Earned income is a major and growing source of
income for nonprofits
• It offers advantages of stability, control,
predictability, accountability
• Partnerships with businesses can support
nonprofits’ new ventures needing expertise from
both
• Win-win for both if carefully handled
• Distinction between mission-related and
unrelated business income important for taxes
• Either form requires careful business plan
Resources
www.managementhelp.org
click on Social Entrepreneurship and on
Business Planning
www.nonprofitsassistancefund.org
click on Nonprofit Business Plan
www.bplans.com
click on Free Business Plans
www.sba.gov/smallbusinessplanner/index.html
click on Small Business Planner and on
Tools
Exercise
• Talk with leaders of nonprofit organizations that
run business enterprises that produce income to
help support their organizations and missions.
• Identify some aspect of your organization’s
programs that could generate income to support
your mission.
• Is a partner needed to bring in needed
resources?
• Use one of the template business plans to
develop a plan for the proposed enterprise.
• Discuss your draft plan with others and
incorporate their suggestions for improvement.
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Business Income for Nonprofits - "Building Community Services That