Chapter 4 – Implementation

The paperwork is away. Now it’s time to actually make this organization do some good. You’ll need to stay on top of things and keep the movements of the board somewhat conservative to prevent anything too drastic from happening to the baby NPO at the outset.

Startup capital

Unless you’re already filthy rich, you may be anxious to know where the startup capital for the NPO will come from. Some private foundations are formed as the result of an inheritance or other windfall. However, most non-profits start as an idea and turns into an opportunity for fundraising.

While some organizations are lucky enough to fall into a very lucrative source of funding that needs no additional support, most NPOs rely on a mixture of funding sources, ensuring status as a public charity. This has the advantage of diversifying your sources so the organization isn’t left high and dry when the “golden parachute” fails and lowering your tax burden even further.

Feeder Organization

A feeder organization (also called a Support Organization, as in IRS tax code Section 509(a)(3)[i]) is a business that operates to make a profit that will then be turned over to the tax-exempt organization it was founded to serve[ii]. The feeder organization looks very much like any for profit business, but it is created solely to serve the needs of the non-profit, often engaged in a related enterprise. For instance, if you go to the science museum and find related merchandise for sale, the proceeds will undoubtedly fund the museum itself.

Such an organization is limited in the way it can give money back to the parent NPO. It must, for instance, turn the funds over to the organization as a whole and not get in the business of giving out grants[iii].

First and foremost, operation of the feeder organization must be secondary to the mission and work of the NPO. The IRS defines this in terms of a “primary purpose test[iv].” Generally this means that if you hit upon the next big thing and make a billion dollars with some product or service you’re selling, you’ll have to expand your charity to make use of those funds or give them away to another NPO.

You will keep separate books and make clear transfers of funds from one to another. Those who help run the business may be volunteers or paid employees. You yourself may volunteer, but cannot expect any sort of reimbursement for your time.

While running such an organization could double the paperwork load, the potential for creating a self-sustaining funding source is also very attractive. While running the feeder organization cannot eclipse the primary purpose of the NPOs mission, you must turn a profit to make the venture worth your while.

Goods

The NPO can sell goods that are related in some way to the curriculum. An organization to develop research that was conducted by the NPO is allowed. You could create the goods or import and resell. You can sell raw materials or finished products. You could target your constituency or someone with a few more dollars in their pockets.

Some NPOs meld their mission and their for-profit goals for greater efficiency. For instance, Goodwill Industries takes donated second-hand goods, refurbishes and sells them with constituent labor that functions also as vocational education. This allows them to not only run a for-profit feeder organization that funds the administration of programs to assist disadvantaged members of the community, but they are also able to use that business to help accomplish the mission of the NPO.

Gift items are also common. Small-ticket impulse items for children are very commonly found at places like museums and theatres. Catalogue and gift shop items usually cater to an older crowd and are geared toward the collector.

Services

The feeder organization could also provide a service for a fee or donation that is then rolled back into the NPO. They Boy Scouts of America once supplied the service of hauling away newspapers. Those papers were sold to recyclers who paid the scouts a small fee for the materials gathered. Car washes and festivals are also examples of services that can be arranged or performed by the members or volunteers of a non-profit.

Though such services usually target the constituency and serve as marketing for the NPO, they may be target a different audience in order to attract their dollars elsewhere. Educational enterprises might offer related media materials to assist the learning process or even a café to feed and water the NPO staff. Research operations may provide consulting services to fund their related basic research that is made freely available to all. Many services have some goods attched to the service. If this is true, the good sold must conform to the guidelines laid out above.

As an educational NPO, you cannot allow your students to become an unpaid workforce. The primary mission must remain education or scientific research. When your workers are no longer learning anything new, the line between charity and exploitation is crossed and your status as a legitimate NPO can be compromised.

Media

Published materials are very common offerings from NPOs. These might be any type of media such as movies, books, compact disks or even downloadable content. It need not be published by or even for the NPO. IRS regulations stipulate that the non-profit must share research and information freely. You don’t need to give your presentation of it away. Feeder organizations can work in conjunction with the NPO to offer their presentation and packaging of said information.

For instance, while Public Television may be non-profit, the companion books to their series may be purchased at any bookstore. The profits from such sales then go to support the show. Such a book may also be used as an incentive during pledge week to get more people to support the show that way.

You may find yourself doing several things with the same intellectual property. It behooves your organization to retain copyright on work it commissions for fundraising purposes. It all depends upon how you want to engage in fundraising.

Intellectual property

This might cover media or the work done at the NPO. Research facilities are very often dealing with issues of intellectual property (IP) when discoveries are made. The pure research arm of the organization works often ideas on, while a separate feeder organization works on developing a saleable product or prototype that will then generate the money needed to fund the NPO itself.

Unrelated Business Income Tax

If the business doesn’t have a purpose that furthers the NPOs mission, other than making money, it will be subject to the Unrelated Business Income tax. The board will have to decide carefully what does and does not constitute a related activity[v].

If you owe tax on such income, you’ll have to file form 990T and pay the tax quarterly if it’s estimated to be more than $500 that year. There seem to be about a million loop holes to getting out of paying this tax for the non-profit, but are of the sort that you’d have to implement from the start to remain exempt. A consulting professional (most likely an accountant) that specializes in tax code might be able to assist you in steering your moneymaking enterprises into the realm of the tax-free.

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