Adopting Earned Revenue Strategies: Worth the Effort & Risk?

1. Adopting Earned Revenue Strategies to Bolster Revenue: Worth the Effort & Risk? • Paula Smith Arrigoni • Emily Chan • Gene Takagi #11npd #11npd

2. Why This Topic, Now? We suggest that: • Increasing earned revenue can help a nonprofit become more financially viable over time • It’s not one size fits all! There are various financial, legal and tax implications to consider. Please share your thoughts and experiences!

3. Overview • Sample nonprofit business model types • Key financial analysis questions • Legal and tax considerations • Business considerations • New legal structures

4. First, Let’s Look at a Few Business Model Types • Human Service • Social Enterprise • Arts & Workforce Development

10. ….Not necessarily a smooth transition to stability

11. Big Questions to Resolve • What do we do for free, that we could get paid for? • Who’s going to pay for the product or service (low income, disadvantaged people can’t!)? • What are the business drivers? What makes the business activity grow?

12. Assessing Cost • “Full costs” include direct costs like labor, materials, travel and R&D, and a portion of indirect costs like rent and utilities, administrative salaries, and insurance. • What does one unit of service or product cost, considering both fixed and variable expenses? • Under-pricing is a recipe for failure. • Costs change over time with volume and increased capacity. Projections should be based on conservative and clear assumptions, and should be revisited.

13. Other Items to Project • Start-up costs (paid with reserves, a grant or debt financing?) • Ongoing working capital needs and access to credit • Impact on facilities • Contingencies to mitigate risk

14. Assessing Demand • Need ≠ Demand • Assessing demand can be simple,(e.g. “We need this service, you’re good at it, an we want to contract with you”) or through a market analysis • A market analysis is comprehensive, surveying factors such as demographics and need, customer’s ability to pay, competition & collaboration, transportation and political issues (e.g. “NIMBYism”)

15. Examples • Let’s start a new business!!! • Let’s buy an existing business!! • Let’s partner with a for-profit! • Let’s start charging for our services.

16. First Considerations • Mission-consistency – articles, bylaws • Board’s legal duties of care & loyalty • Prudent investment

17. Next Considerations • Employees • Licenses, Permits • Leases • Insurance • Trademarks • Taxes?

18. Tax Considerations • Tax-exemption relates to income tax • Business activities okay • BUT: Is all business income nontaxable? No.

19. IRS – Tax Perspective

20. Related Business • Advances the organization’s charitable purposes irrespective of profits.

21. Unrelated Business • A trade or business; • Regularly carried on; and • Not substantially related to furthering the exempt purpose of the organization.

22. Substantially related? • IRS considers factors such as: • Nature and size of business • Fees • Who is served • Business operations For each activity!

23. Exclusions & Modifications • Including: • Volunteer workforce • Convenience of members • Selling donated merchandise • Passive income* * debt-financed property exception not addressed here

24. Application of the Rule

25. Business Considerations • Unrelated business okay but… • Unrelated business income tax? • Jeopardizes exempt status?

26. Additional Business Considerations • Private benefit (actual or perceived) • Mission creep • Culture compatibility

27. Legal Form Considerations • In-house • Subsidiary • Other social enterprises

28. In-house • IRC § 501(c)(3) Rules • Articles of incorporation – restriction? • Basis for exempt status – incompatible? • Capacity?

29. Subsidiaries • Tax-exempt or taxable subsidiary • Considerations • Business • Legal • Tax

30. Other Social Enterprises • Certified “B” Corporation • L3C • Benefit corporation • Flexible purpose corporation • Nonprofit – for-profit joint ventures

31. Disclaimer The information contained in this presentation has been prepared by NEO Law Group and is not intended to constitute legal advice. NEO Law Group has used reasonable efforts in collecting, preparing, and providing this information, but does not guarantee its accuracy, completeness, adequacy, or currency. The publication and distribution of this presentation are not intended to create, and receipt does not constitute, an attorney-client relationship. 201 Spear St., Suite 1100San Francisco, CA 94105415.977.0558info@AttorneyForNonprofits.comwww.AttorneyForNonprofits.comwww.NonprofitLawBlog.comhttp://twitter.com/GTak http://twitter.com/emilychan

32. Contact Information & Additional Resources Some useful definitions and examples: www.nationalassembly.org/Publications/.../earnedrevenuestrategy-ncne.ppt An experienced Bay Area consultant to help you vet and implement your plan (Jan Cohen): http://www.linkedin.com/in/jancohenconsulting Make new friends and share your ideas (SF Chapter of Social Enterprise Alliance): http://www.seasfbay.org/ Paula Smith Arrigoni paula@smithanddaley.com 925.478.7252 www.smithanddaley.com @smitharrigoni Emily Chan emily@attorneyfornonprofits.com 415.977.0558 www.attorneyfornonprofits.com www.nonprofitlawblog.com

33. Please Fill Out Your Evaluations Session Objectives • First Objective • Second Objective • Etc. Session Materials and Additional Resources available at: www.compasspoint.org/nonprofitday #11npd