Have you ever wondered if a nonprofit can own a for-profit? The easy answer is yes, but we are going to explain things in a bit more detail for your reference.
There are certain nonprofit and for-profit regulations which are important to understand.
Read on to learn the ins and outs of these rules and regulations to help you get the most benefit from your nonprofit owning a for-profit.
What is a Nonprofit?
A nonprofit is an organization with a specific mission. Typically, nonprofits have a purpose of serving a specific audience. A nonprofit can generate revenue, but funds must be used to support the mission of the organization.
One good example of a nonprofit is the Make-A-Wish Foundation. The mission of this nonprofit is “together, we create life-changing wishes for children with critical illnesses”. All funding provided to the Make-A-Wish Foundation supports their work to make these wishes come true.
Here is a screenshot of their website which shows how they share the impact of a wish on the children they serve.
Unlike a for-profit business, profits are not distributed to anyone within or outside of the organization such as stock holders etc. Nonprofits are considered a corporation in terms of tax status, but are usually tax exempt because they use their revenue to support their mission.
Because a nonprofit organization is designed to provide a service to a certain audience, the organization can accept charitable donations such as private donations, grants, etc. By accepting these types of funds, the nonprofit must fulfill the intent of those who donate.
One important thing to note is that since nonprofit organizations are designed to benefit the public and because they accept charitable donations, their tax information is public record.
It’s also helpful to note that a nonprofit can donate to a for-profit entity as long as the donation furthers the mission of the nonprofit in some way. Nonprofits can also donate to individuals if it is in support of their mission.
Nonprofits donating to for-profits may not be very common, but many for-profits donate to nonprofits. One major reason that for-profit companies donate to nonprofits is because these donations are tax-exempt.
What is a For-Profit?
Unlike a nonprofit, a for-profit business has a purpose of making money which is typically distributed to shareholders. A for-profit will be considered either public or private based on who the profits are distributed to.
A public for-profit allows regular people to purchase shares or “partial ownership” in the company. A private for-profit is a business that does not allow the general public to purchase shares or stocks.
You may still be able to purchase shares for a private business, but they will not be available through regular channels such as the stock market.
The way that many for-profit businesses make money is through selling a product or service that people need. Because these businesses are designed to make money, all revenues are taxable. Since for-profit companies are not designed specifically to serve a certain mission which focuses on serving the public, they do not have to provide access to tax information.
A grocery store or even a vehicle manufacturer still serves the public by providing goods that they can use, but they do not have one specific mission which all profits must support.
You likely know of many for-profit businesses, but one good example is Walmart. The purpose of this business is to sell products to the public which in turn make profits for the company. Keep in mind that a for-profit business could also be the local grocery store or coffee shop in your neighborhood. For-profit businesses come in all shapes and sizes.
While we are discussing differences between nonprofits and for-profits, it’s helpful to mention that many for-profit companies operate nonprofits or foundations for charitable purposes.
One good example of a for-profit company operating a nonprofit or foundation is Wells Fargo. Wells Fargo is a for-profit bank which generates money. However, they also operate the Wells Fargo Foundation which was created to donate funds to various nonprofit organizations to support specific work such as assistance for low-income families or environmental projects.
The Wells Fargo Foundation is a nonprofit organization in that all money is used for charitable purposes.
However, a for-profit cannot own a nonprofit because nonprofits are not owned in the traditional sense. When a for-profit operates a nonprofit, they can control the organization through a board of directors and therefore dictate how their investments are used and how the nonprofit functions.
Why Might a Nonprofit Own a For-Profit?
The answer to whether a nonprofit can own a for-profit is yes. We are going to walk you through some reasons why a nonprofit might want to own a for-profit, including how the for-profit could benefit the nonprofit’s mission.
There are multiple reasons why a nonprofit might want to own a for-profit. The nonprofit may want to sell items to help generate revenue that supports their mission. While a nonprofit is allowed to generate revenue, generating certain amounts of revenue can garner unwanted attention.
Nonprofit and for-profit rules dictate the different ways which revenue is to be earned and used. Creating a for-profit can help a nonprofit increase revenues without causing red flags with the IRS.
A for-profit may also look more appealing to certain investors who are traditional business people. Through owning/operating a for-profit, the nonprofit may be able to gain additional investment support.
Another reason a nonprofit might look into owning for-profit businesses is because they may be struggling to gain enough funding to support their mission through traditional charitable sources.
For example, a nonprofit women’s shelter could decide to operate a for-profit thrift store. The staff of the store could be women who are working to get back on their feet and profits from the thrift store could be used to help fund the shelter operations.
In this case, the for-profit allows the nonprofit the opportunity to continue helping those needing its services while also raising some additional funds to support its mission. It is also possible for a nonprofit to be gifted ownership in a for-profit from someone hoping to provide monetary support for the mission of the nonprofit.
There are no rules to stop a nonprofit from owning a for-profit as long as things are managed properly. We will explain a few of the general rules in a bit more detail in the next section.
General Rules Nonprofits and For-Profits Need to Follow
There are a few general rules that can help you learn more about the ins and outs of nonprofits owning a for-profit. Following these rules will help you make sure to manage this type of relationship properly.
1. Serve the Public Interest
When a nonprofit and for-profit are working together in any form, they must serve the public interest or public good.
As we discussed earlier when explaining what a nonprofit is, we noted that they are designed to support the public good. Whether the nonprofit helps provide housing, food, education, or other benefits, their mission must serve a need in their community.
The nonprofit is able to receive donations and other monetary support because of the work that the organization does to serve those in need.
While a for-profit is designed simply to make profits which are in turn provided to shareholders or others invested in the business, when working with a nonprofit, these profits must serve the nonprofit mission. To meet the definition of nonprofit, this mission must somehow serve the public interest.
2. Must Both Support the Same Mission
When a nonprofit is starting or partnering with a for-profit, both organizations need to support the mission of the nonprofit. The for-profit business may not have the exact same purpose as the nonprofit, but funds which the nonprofit receives from the for-profit must support the mission.
If the for-profit business does not support the mission of the nonprofit or at least provide funding to support said mission, then there is no reason for the nonprofit to be involved.
3. Follow Investment Rules
It is very important that the nonprofit organization understands the investment related rules when partnering with or owning a for-profit.
The nonprofit must follow the Uniform Prudent Management of Institutional Funds Act (UPMIFA) to make sure it can maintain tax-exempt status. You can view the details of the UPMIFA here.
The UPMIFA is the only set of what we would call nonprofit and for-profit regulations. The act helps to ensure that both the nonprofit and for-profit involved in this type of relationship follow rules governing each type of separate organization.
These rules are designed to make sure that the nonprofit continues to operate for the public benefit. The act also helps to ensure that the nonprofit is not using the for-profit to “work around” nonprofit regulations.
Failure to follow the proper investment rules may result in your organization losing tax exempt status and/or nonprofit status.
4. Keep Nonprofit Priorities First
When a partnership between a nonprofit and a for-profit is formed, it can be easy for lines to get blurred. If your staff and board are managing both organizations, it is important to keep the focus on the nonprofit.
If you get too wrapped up in operating the for-profit, you may lose sight of the original mission that your nonprofit set out to achieve.
Depending which set up you choose for operating or partnering with a for-profit, you may find that you have two separate boards which can help to keep operations separate.
5. Maintain Separate Management
For the nonprofit and for-profit to be considered separate entities, it is recommended that they have different management or board of directors. While having completely separate management is not required, it can help to distinguish between the two entities and not cause confusion.
If the two entities are not clearly distinguishable, the nonprofit could risk losing tax exempt or nonprofit status.
Following nonprofit and for-profit regulations will help both organizations make sure to meet the expectations of those supporting their work.
Wrapping Up: Can a Nonprofit Own a For-Profit?
We have provided several insights into nonprofits owning for-profit businesses. While a nonprofit can own a for-profit, it is important to note certain rules and regulations regarding this type or relationship to ensure that your organization maintains nonprofit status.
Owning a for-profit can help your nonprofit secure additional revenue sources to support its mission and creating a for-profit may help void certain tax related issues. Make sure that you understand all of the rules and manage the two organizations correctly.
As long as you understand the proper steps to take, owning a for-profit could be a good way to increase support for your nonprofit and further its mission.