Too Good To Be True: Sustainability Through Earned-Income?
| Posted in Management on Oct 24, 2012 by |
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Necessity is the mother of invention and difficult times can inspire creativity. As we all know so well when non-profits are faced with a declining economy funding can be compromised. In light of this challenging economic environment more and more non-profits are pursuing innovative earned income and entrepreneurial efforts to sustain their vision and mission. It’s important to realize that profit is not denied to a nonprofit as long as the organization is pursuing the mission for which it was founded. Revenue-earning activities should not be looked at as a last resort but should be seen as a great way to grow a firm financial foundation to provide services and programs. A long-time example of earned income is the way in which the Girls Scouts continually raise funds through selling annual cookie sales. Their approach has provided long-term sustainability for the organization throughout the years.
Before jumping into an earned income venture make sure you think through what programs, products and services your organization already has in place that could be used to generate income. If your main work is providing a facility and support services to the poor or unemployed then using your facility at night for birthday and wedding functions would not be appropriate (nor related to your mission), but setting up a thrift store or even creating a construction service to employ homeless or unemployed to work in the community may be a great idea. Other types of earned income may include providing a fee-based day care, landscaping services, construction services, catering, facility rental, contract services, and fee-for-service work.
Critical Success Factors
Industry knowledge or expertise
As mentioned earlier, I recommend starting this process by considering what you are already doing that could complement an earned-income strategy. Determine if there is someone (staff, board, or volunteers) within your organization has the knowledge and expertise to create, maintain and sustain the ongoing efforts of the activity. Volunteers can support the work by offering their services for free allowing your organization to create a revenue-generating activity with very little overhead for staffing.
Excess capacity
Can your organization handle an additional activity? If you are like many nonprofits, your staff may already be maxed out and working more hours than they’d like. Perhaps you need to reevaluate your priorities in order to begin a revenue earning activity. However, if considering an earned income venture impedes on your vision and mission you should not put the time and effort into the activity.
Location
A great motto in any start-up business goes like this: location, location, location. Thinking like a business in this regard is important: can people access the services you want to provide? If not, then either rethink the location if it is easy to move or rethink the service you want to provide and the reach it will or won’t have in your current location.
Impact of charitable operations and status
There is nothing wrong with a non-profit making money. In fact, nowhere does it say that non-profit’s cannot earn money. However, there is a line to which non-profits can make money, obviously or otherwise they would then be called for-profits. All 501(c)(3) organizations must give priority to the nonprofit's stated mission and all business efforts must be “substantially related” to its mission. To qualify as substantially related, the business has to specifically accomplish the nonprofit's goals.
Tax implications (unrelated business income tax - UBIT)
If the business efforts of a non-profit do not align with the mission then those activities are subject to taxes and the 501(C)(3) status could be in danger of being taken away. More importantly any income earning activity that is related to the mission is not subject to tax. For instance if summer art courses are provided to students at a fee at a local museum this is directly related to the museum’s mission of art education and proceeds would be tax-exempt. However if the museum rented out the space for rock concerts on a regular basis this would be unrelated business activity and the proceeds would be liable for tax.
In her article Joanne Fritz highlights that there are a few activities in which the IRS will not tax activities even if they don't seem related to the nonprofit's mission. Some of those activities include:- Activities where volunteers do nearly all the work.
- Activities that are carried on primarily for the benefit of members, students, patients, officers, or employees. An example might be a gift shop at a hospital that serves patients or employees.
- The sale of merchandise that has been donated to the organization, as in a thrift store.
- The rental of mailing lists of donors or members.
- Distributing incentives that are worth less than $5. Examples are stamps or pre-printed mailing labels given as incentives for donating money.
Next Steps
Over the last couple of months we’ve covered a variety of funding options. The following highlight a basic plan in how to start the process of funding your organization:- Identify how much money you need to raise.
- Assess opportunities and capacity to see where you can achieve immediate success
- Focus on your organizational strengths
- Map your relational network
- Acquire tools and systems needed to be successful
- Build your team
- Get started
Please feel free to contact us at 417-894-4640 if we can help you in this process.
Recommended: Resources
Venture Forth! the Essential Guide to Starting to Moneymaking Business in Your Nonprofit Organization - Fieldstone Alliance
Financing Not Fundraising: Evaluate Earned Income - http://www.socialvelocity.net/2011/04/financing-not-fundraising-evaluate-earned-income/
IRS Document, Tax on Unrelated Business Income Exempt Organizations - http://www.irs.gov/pub/irs-pdf/p598.pdf
INC magazine: http://www.inc.com/magazine/20110501/the-social-entrepreneurship-spectrum-nonprofits-with-earned-income.html
Tiffany Applegate is President at Applegate Consulting, she has provided thousands of nonprofits expertise and practical guidance for building, strengthening, and growing their organizations and increasing their impact. In addition to working directly with nonprofit organizations, Mrs. Applegate has served as a lead trainer for two federally funded capacity building initiatives and provides training and technical assistance for a variety of State and Federal programs. Get more information at ApplegateConsultingInc.com or call (417) 894-4640.
Tags:
Earned-Incom Sustainability Nonprofit Finance Unrelated Business Income Tax UBIT
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