Social Ventures 101 Presentation for “Communiversity” February 8, 2012 Prepared by Melissa Auchard Scholz, Scholz Nonprofit Law LLC, 2012

Social Ventures 101

Presentation for

“Communiversity”February 8, 2012

Prepared by Melissa Auchard Scholz,Scholz Nonprofit Law LLC, 2012

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Nonprofit or Not?

Non-profit versus for-profit– Social ventures– Social enterprise– Mission driven

Either or both It Depends!

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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?

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What Is a Nonprofit?

Entity organized under state lawe.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

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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

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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

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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

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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

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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

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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?

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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.

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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

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Competition with commercial enterprise = strong indicator of UBI

Comparison to commercial operation, including:– Marketing– Advertising– Distribution– Scale– Suppliers– Price

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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/

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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

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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/

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Contact Information

Melissa Auchard ScholzScholz Nonprofit Law LLC608/[email protected]

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.

Documents

Social Ventures 101 Presentation for “Communiversity” February 8, 2012 Prepared by Melissa Auchard Scholz, Scholz Nonprofit Law LLC, 2012