More and more for-profit companies want to save the planet and benefit their communities. Mmeanwhile, nonprofits are finding ways to generate revenue by selling products and services. What is the world coming to? The clear distinction between nonprofits and for-profits is eroding, but the legal regime has not caught up to this reality. Whether an organization is nonprofit or for-profit continues to have major implications for what it can and can’t do and how it can be funded.
A nonprofit, tax-exempt organization cannot have investors, pay dividends, or conduct a substantial amount of activities unrelated to its mission (and what the IRS considers “related” is far from clear). It cannot confer benefits beyond those incidental to its mission on individuals or businesses. It must not pay more than market rate for goods and services.
A for-profit is rarely eligible for grants. It cannot receive tax-deductible donations. It cannot have volunteers. It generally must put the interests of investors ahead of any social mission.
But partnerships between for-profits and nonprofits can bring together the best of both worlds. Here are some examples of such partnerships.
New Avenue is a Berkeley-based business whose mission is to reverse sprawl and increase affordable housing by making it easy for homeowners to add small environmentally friendly housing units to their properties. Recognizing that these activities might be appealing to a philanthropic donor, New Avenue’s founder partnered with a like-minded nonprofit organization to secure a grant from the Clinton Foundation to complete a model home.
One of Berkeley’s Sun Light and Power’s biggest challenges is finding workers qualified to install solar panels and water heaters. Meanwhile, training new employees is costly and time-consuming. So Sun Light and Power partners with Solar Richmond, a nonprofit organization that trains low-income community residents for jobs in the solar industry.
The Oakland-based for-profit Mandela Foods Cooperative partners with a nonprofit sister organization to raise funds from foundations, local government, and private donors to support its mission to bring healthy food to West Oakland and provide business ownership opportunities to low-income community residents.
Wealthy professional athletes set up a for-profit investment fund whose purpose was to invest in publicly beneficial minority businesses in low-income communities that lack affordable access to capital. A private foundation made an investment in this fund to further its mission of helping individuals attain economic independence by advancing educational achievement and entrepreneurial success.
A for-profit curriculum developer and a nonprofit college formed a limited liability company in which they were 50-50 partners. This LLC conducted a profitable teacher-training business and the profits were split by the nonprofit and the for-profit.
A supermarket partnered with a nonprofit community organization to apply for a federal job-creation grant. The application included a business plan that described how the $700,000 grant would be used by the for-profit supermarket to expand its operations and place the nonprofit’s low-income clients in the jobs that were thereby created.
A nonprofit organization built a shopping center and provided below-market leases to local businesses in exchange for their promise to give first preference to low-income community residents when filling the jobs in their stores.
These examples demonstrate some legal principles governing the relationships between nonprofits and for-profits:
1. A nonprofit can pay a for-profit as long as the payment is fair to the nonprofit. For example, a nonprofit that receives a grant to build a model green home but lacks the expertise to build the home itself may contract with a for-profit to build the home as long as the payment is not above market rate.
2. A nonprofit can conduct activities that directly benefit private businesses if they further its charitable purpose. So, for example, a nonprofit whose mission it is to help disadvantaged small businesses can make low-interest loans to such businesses. And a nonprofit whose mission it is to help low-income individuals find employment can provide free training services that benefit for-profit businesses.
3. Foundations can make loans to and invest in for-profit businesses if the primary purpose of the loan or investment is charitable or educational. This is called a Program Related Investment and it is becoming increasingly popular among foundations. The Gates Foundation has been one of the leaders of this movement. A new legal entity, called the Low Profit Limited Liability Company (aka L3C), has been created by several state legislatures to encourage foundations to invest in for-profit businesses that commit themselves to charitable or educational purposes.
4. A for-profit business can enter into a partnership with a nonprofit and earn market-rate returns on its investment so long as the partnership’s activities further the nonprofit’s purposes. So, for example, a real estate developer may partner with a nonprofit whose mission is to promote affordable housing. If the partnership builds a housing project, the developer can earn a reasonable return on its investment.
The law governing nonprofits’ involvement in business ventures is not always clear and can be complicated. But there is growing interest among savvy nonprofits in creating mutually beneficial relationships with for-profit businesses. Smart entrepreneurs are making friends with their nonprofit neighbors!
