And I know one more set of questions you will eventually have.
Those among you who must keep in touch with all things legal and lawful might appreciate the following. But, first, let’s assume three possibilities and the legal and tax ramifications. I ran the following through legal counsel and it is believed to be accurate. But as a disclaimer, I am not an accountant nor am I providing tax advice. This is a simplified overview and I highly recommend you seek professional tax counsel.
Possibility #1: By joining forces with the Hope Movement your nonprofit earns $1,000 or less.
In this scenario, you are not required to report this earning or pay taxes on those earnings. Your organization is not in jeopardy of losing nonprofit status.
Possibility #2: Your organization’s participation with the Hope Movement earns more than $1,000.
In this scenario, this means you submit a Form 990T (Exempt Organization Business Income Return) and a tax bill is generated on those earnings. As long as you pay the tax bill, your organization is not in jeopardy of losing nonprofit status.
Note: However, you will want to explore with consultants the issues of corporate mission defined by your by-laws. For instance, if you are an organization that already has an outreach that includes families, women, and children it could be that your participation in the Hope Movement where malnourished children are nourished by your participation is part of your corporate mission. This being the case, it could be that paying taxes will be a non-issue.
By the way. The organization I lead had to submit a Form 990T recently as a result of our earning some money through some non-related sales. So I have personal experience with this one.
Possibility #3: Your nonprofit earns “substantial” income through the Hope Movement
At this point, and with the note above in consideration, it is wise to create a wholly-owned subsidiary, whose purpose would be to generate income via a for-profit business; in this case, your social business relationship with the Hope Movement. Since this subsidiary is a separate entity for legal purposes, it would be legally responsible to pay taxes on earnings. Tax laws of a given state or country in which the subsidiary is incorporated would apply to the subsidiary, but not to the parent company, which, in this case, is your nonprofit organization. Earnings left over after taxes are paid would be available to your nonprofit organization. As long as you form the wholly-owned subsidiary in this scenario, your organization is not in jeopardy of losing nonprofit status. An example; sometimes gift stores in nonprofit hospitals are in this category and exist as a wholly owned subsidiary of the hospital itself.
Drawing from the three possibilities above, here is the worst-case scenario: your nonprofit earns so much it has to form a wholly-owned for-profit subsidiary, a legal entity that pays taxes on its earnings. This is the worst-case scenario if you move forward. Or, perhaps there is another worst-case scenario from an opposite spectrum that if you venture nothing, you gain nothing.
Consider this quote from that same Inc. Magazine article.
“A 501(c)(3) nonprofit can still generate earned income. And plenty do. The National Center for Charitable Statistics estimates that nearly 70 percent of the $1.4 trillion generated by nonprofits in 2008 came from the sale of goods and services.”
However, just recently I did some research to upgrade these numbers. Based on 2012 statistics the amount generated is now up to $1.7 trillion and the sales of goods and services approach 80% of that number.
So, where are things heading? Does it bother you that only 20% to 30% of the income for nonprofits comes from donors? Is there a hidden message here?
With all of this in mind could it be that Development Directors of nonprofit organizations of the future will have a new dynamic added to their job description? In addition to recruiting and building relationships with a donor base and organizing fundraising events; it will also include building an expanded national and international team of social businesses that promote the Hope Movement.
Done right, this could bring incredible fiscal change to the charity, which, until the entrance of social business, had all its fundraising eggs in just a few traditional baskets. For some nonprofits, whose last fundraising event hinted at an uncertain future, this could provide much-needed relief.
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