As public and private funding shrinks, and expenses grow, many of my clients must seek other forms of revenue to support the not-for-profit organization’s activities, salaries and other expenses. These organizations have been determined to be exempt from federal income under IRC 501(c)(3) and must be careful in order to protect that exemption. Many questions arise about what income and revenue the organizations generate is exempt and what income is not “substantially related” to the purpose for which the organization was formed. According to the IRS, Unrelated Business Income is “the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses its profits derived from this activity”.
Common Interest: Ben Flavin on the intersection of arts, community development and the law.
There is a great article on crowd source funding for non-profits in today’s NY Times. It discusses the trial and error process organizations like Kiva and Watsi have gone through to bring funding from individuals that have money to give directly to the individuals who need it most. The article raises some interesting issues about nonprofit transparency, nonprofit expenses and fundraising.
Opening Remarks: Not for Profits and Social Enterprise: Starting and Managing your Public Interest Company
I recently watched a presentation on nonprofits and the way we look at them today. The presenter challenged the audience to consider why we pay very little for people who want to help and compensate highly those that do not want to help. This is an extremely interesting question and with an ultimately depressing answer. In my law practice, I am asked this question frequently by the nonprofits I counsel. Or at least I’m asked a similar question: how do we compete for talent with the for-profit sector? How do we set our employees’ and officer’s salaries?
Nearly every entrepreneur or team that comes to my office immediately asks about “hybrid organizations”. This topic of mixed non-profit/for-profit organizations grows daily as funding for charities becomes more competitive and the nonprofits are expected to generate more of their own revenue. There is no question that much of the thinking and many of the laws surrounding nonprofit organizations are outdated. It’s a challenging topic that some states have begun to address. Several States have adopted legislation that allows the formation of Low Profit Limited Liability Companies (“L3C”) and Benefit “B” Corporations (“B-Corps”). However these new forms of businesses haven’t answered the inherent conflict between a charitable purpose and a profit-making goal. Ultimately the IRS has not yet recognized L3Cs and B-Corps as charitable organizations by bestowing the public benefit of federal income tax exemption.
On April 4th at CUNY Law School in Long Island City, New York, I will be facilitating a seminar on creating and managing a public interest minded company. The presenters are skilled attorneys who work intimately with not-for-profit organizations and have incredible experience to share. If you are in New York, and are interested, please see the information below to learn more and register.
NPQ Newswire’s Ruth McCambridge commented today on a recent report from the Nonprofit Media Working Group that addresses the need for the IRS to update it’s criteria and rules around granting nonprofit media companies the federal income tax exemption afforded to other organizations determined to be exempt. I’ll be honest, I haven’t read the report yet, but clearly it’s timely. The IRS has been stalling in their determination that these nonprofit media companies are in fact 501(c)(3) exempt organizations. The question the IRS has asked, and quite possibly a legitimate question, is how is this media different than a for-profit media company. I think this is the right question. The answer that the IRS is looking for – that exempt companies are funded purely by private donations and grants- is wrong. In this economy nonprofit organizations, whether they focus on media, dance, or immigration reform, cannot depend solely on donations. Nonprofits must be granted the flexibility to embrace the entrepreneurial spirit and generate revenue to support their mission, to supplement the generosity of foundations and individual giving. In order to support its mission, nonprofits must be financially viable companies first and the IRS will need to recognize this soon.
Known as exempt, non-governmental, foundations, charities, non-profits, community-based organizations, these corporations tackle issues as far ranging as providing housing for artists to large private foundations charged with tackling the severity of poverty, climate change and civil rights. Not-for-Profit economic contributions comprise 5.4% of the U.S. GPD.