Social Ventures 101 Presentation for “Communiversity” February 8, 2012 Prepared by Melissa Auchard Scholz, Scholz Nonprofit Law LLC, 2012
Nonprofit or Not? • Non-profit versus for-profit • Social ventures • Social enterprise • Mission driven • Either or both • It Depends!
Nonprofit or Not? • Why, What, Who, When, Where, How • Key issue = how will your idea be funded? • Do you need to be able to accept tax-deductible contributions? • Will you be selling something?
What Is a Nonprofit? • Entity organized under state law e.g., WI = “nonstock corporation” under Ch. 181 • Tax-exemption obtained through IRS • 501(c)(3) = charitable, educational, religious, scientific, etc. • Private foundation or public charity • 501(c)(4) = social welfare organization • 501(c)(6) = trade association
What is a Nonprofit? • Does not mean “no profit” for organization • Does not mean no selling • DOES mean that “profit” cannot go to individuals • Reinvest profits in organization • Pay reasonable compensation
What does it mean to be “Tax-Exempt under Section 501c3”? • Exempt from federal & WI income tax for organization’s “related activity” • Eligible for exemption from state sales taxes • Eligible for real and personal property tax exemption • But not all 501c3s qualify under WI law • NOT exempt from employment taxes • Exempt from WI unemployment tax if have 4 or fewer employees • File Form 990 “information return” as tax return
What does it mean to be “Tax-Exempt under Section 501c3”? • Eligible for tax-deductible contributions • Public subsidy = more regulation and more responsibility • Operated for “public” not private purposes • E.g., no organization to help 1 individual with medical expenses • No enrichment of “insiders” • No “owners” • Led by a Board of Directors or Members + Board • WI requirement = at least 3 persons on the Board
What does it mean to be “Tax-Exempt under Section 501c3”? • Assets permanently restricted as charitable assets • OK to lobby “insubstantial” amount, for public charities • “501h election” gives 501c3 parameters based on the c3’s annual budget • No political activity: can’t support or oppose political candidates
Earned Income by Nonprofits: Related or Not? • Key issue = how income is earned, not spent • If earned through activity that is related to exempt purpose, not taxable and no threat to tax-exempt status • If earned through “unrelated” business activity (unrelated business income or “UBI”), subject to unrelated business income tax (“UBIT”) and too much threatens tax-exempt status
Earned Income by Nonprofits: Related or Not? • Related v. unrelated business income: Is the income earned from a “trade or business, regularly carried on, that is not substantially related” to organization’s exempt purpose?
Earned Income by Nonprofits: Related or Not? • Trade or business is any activity carried on for the production of income from the sales of goods or the performance of service. • Business activities are regularly carried on if they occur with a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.
Earned Income by Nonprofits: Related or Not? • Not substantially related: A trade or business is “related” only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes (other than through the production of income) and that causal relationship is a substantial one. • i.e., production of income, distribution of goods, or performance of service must contribute importantly to accomplishment of the exempt purposes
Earned Income by Nonprofits: Related or Not? • Competition with commercial enterprise = strong indicator of UBI • Comparison to commercial operation, including: • Marketing • Advertising • Distribution • Scale • Suppliers • Price
Earned Income by Nonprofits: Related or Not? • Exceptions include: • Volunteer labor • E.g., volunteers selling at snack bar • Convenience of clients/members • E.g, coffee shop at hospital • Donated merchandise • E.g., thrift shop • Qualified trade show or convention • Corporate Sponsorship Payment • Caution: sponsorship can’t be an advertisement
Earned Income by Nonprofits: Related or Not? • Passive income is, generally, not UBI: • Interest • Dividends • Royalty payments • Rents from real property • UNLESS, except for dividends, from “controlled subsidiary” or debt-financed property
Earned Income: Implication of UBI? • Net profit from UBI taxed at corporate rate • Expenses that are “directly connected with carrying on” the unrelated business deducted against UBI • Insubstantial amount of UBI is OK • If >15-20% of annual gross receipts, unrelated business should be done through for-profit subsidiary
Corp. - Stock Corporation • Ch. 180 corp. in WI or organize in another state & register as “foreign corporation” in WI • Will have 1 or more shareholders • Only requires one director
LLC - Limited Liability Company • Organized under Chapter 183 in WI • 1 or more members • But if single member, then a “disregarded entity” for tax purposes • May be managed by a board or by a member/members
L3C - Low Profit Limited Liability • Variation on an LLC • Not available in WI but can be organized in another state & register as a “foreign corporation” in WI • Must have an explicit primary charitable mission and earning a profit can only be a secondary mission • Operate as standard LLCs for tax purposes
Benefit Corporations • Variation on a standard business corporation • Gives protection to Boards that consider social and environmental issues when making decisions on behalf of the corporation • Not available in WI but can be organized in another state & register as a “foreign corporation” in WI • Requirements: • Create a “material positive impact” • Impact must be assessed by a 3rd party • Report results annually
B Corp. Designation • B Lab, a nonprofit organization, certifies B Corporations, the same way TransFair certifies Fair Trade coffee or USGBC certifies LEED buildings • Certified B Corporations are a new type of corporation that “uses the power of business to solve social and environmental problems.” • See http://www.bcorporation.net/about • To receive B Corp. designation must complete an application and adopt required legal language in corporate documents
How to Form a For-Profit Entity • File articles of incorporation or organization • Include special language if necessary • Obtain tax identification number (EIN) & WI DOR registration • Prepare bylaws/operating agreement and shareholder/member agreements as appropriate • Include special language if necessary • Get tax advice • Establish necessary employment tax accounts
How To Form a 501(c)(3) • Form corporate entity • File articles of incorporation • State of WI form does not work for IRS • Secure at least 3 Directors and name officers • Prepare bylaws (filed with IRS but not WI) • Obtain tax identification number (EIN) • Establish necessary employment tax accounts • For info on employee v. independent contractor See:http://dwd.wisconsin.gov/wc/employers/independent_contractors.htm
How To Form a 501(c)(3) • Prepare Form 1023, application for tax-exemption • Include Narrative: Why, What, Who, When, Where, & How • Three year budget: current year + 2 future years • $400 fee if <$10K; $850 if >$10K • Exemption will be retroactive back to date of incorporation, if filed within 27 months
How To Form a 501(c)(3) • Seek assistance from knowledgeable advisor • E.g., Scholz Nonprofit Law at http://scholznonprofitlaw.com/ • Consider whether M-LINC can help (Marquette Legal Initiative for Nonprofit Corporations). • Advice available by telephone • Good resources available at: http://m-linc.org/
Alternatives to Forming New Organization • Fiscal sponsorship = a 501(c)3 public charity (the “Sponsor”) supports individuals or a nonexempt organization (the “Project”) to undertake a charitable (etc.) activity • For Sponsor to be able to collect tax-deductible contributions on behalf of Project, Sponsor must have “complete discretion and control” over the finances but Project can run the program • Contract for services - propose providing services to existing organization and help find funding for your services
Additional Resources • IRS Publication 557 at http://www.irs.gov/formspubs/index.html • IRS Publication 526, Unrelated Business Income, http://www.irs.gov/formspubs/index.html • Life Cycle of an Exempt Organization at irs.gov • Social Enterprise Alliance, https://www.se-alliance.org/ • Scholz Nonprofit Law, http://scholznonprofitlaw.com/
Contact Information Melissa Auchard Scholz Scholz Nonprofit Law LLC 608/268-0076 Melissa@scholznonprofitlaw.com www.scholznonprofitlaw.com This presentation is intended for informational purposes only and is not intended as legal advice on specific matters, factual situations, or issues. Different facts, information or developments in the law may affect the material in this presentation.