I got an email from a nonprofit exec who had been in one of my training sessions last year. He was just checking on something I had said about starting a new venture or expanding a service: that a: there is no state or federal statute that says a 501(c)(3) can't make money, b: that making money is good for mission, and c: that his organization probably (hopefully!) does something already that makes money--it's called fundraising. The exec (we'll call him Jack) said that BOTH his accountant and his attorney told him that if he started a new venture, in his case a thrift shop, and was budgeting to make money, he had to set up a for-profit corporation, or he might lose his tax exempt status. His question was this: when you (Peter) spoke to us, you said that the vast (99%) majority of nonprofits don't need a for-profit subsidiary, so do I or don't I.
He didn't, and you probably don't either. I find it nearly impossible to believe that this mis-conception is still out there and worse, that people are charging nonprofits to mis-inform them. Facts, please:
First, anything you do that takes in more income than it spends is a for-profit activity, in the financial sense. You're probably doing it for the mission, but if it makes money it's for-profit. And, of course, you can do that inside your nonprofit shell.
Second, if you do something not related to your mission, you have to file a 990T every year to show your Unrelated Business Income.
Third, if you make money on your unrelated income, you are subject to federal taxes, called unrelated business income taxes. BUT, you only pay taxes if you make money and, of course, there is still profit left over! In other words, paying taxes is a good, not a bad, problem.
Finally, none of the above actions is any threat to your tax-exempt status. So, Jack didn't need a for-profit corporation, which saves him big bucks, an annual audit and often, suspicious oversight in his community.
Don't believe me? Go to: www.firstgov.gov/Business/Nonprofit.shtml and nose around the IRS website. Search there for UBIT (Unrelated Business Income Tax).
And please, try to end this misinformation chain letter. It's getting old, and not making anyone a dime.