Steward Leaders: [Non-Profit Myths 3] For-Profit Business

Posted by Matthew Thomas

Yes, your non-profit can own a business.

 

Over the past several weeks, we've talked about some myths that operate within the public perception of non-profits. We've looked at the "free" business model as not just pertaining to non-profits. We have looked at six big myths. We have looked at "making money", and non-profits' responsibility for taxes.

 

Today we look at how a non-profit can own a for-profit business. This is the third myth we talked about previously.

 

The fact is that non-profits with funds invested in mutual funds or stocks are already part-owners of for-profit businesses. Most non-profits (particularly those with endowments) have an investment portfolio that includes stocks (either individual stocks or stock-based mutual funds, which are baskets of individual stocks balanced to achieve some investment objective, such as tracking an index). Holding stock in a company is an ownership stake. This ownership gives rights to profits and a percentage of assets if the business closes or sells (and has remaining assets).

 

Like what you're reading? Subscribe Now! Beyond stocks and mutual funds, non-profits can own an entire business (or a significant share) of even a privately held company. Some non-profits actually start their own businesses and own the entire business! It's entirely legal. And it happens regularly.

 

So the question is not whether it's legal or appropriate for a non-profit to own a for-profit business - since most do. The question is why a non-profit would want to own a business in the first place. What is the value to a non-profit?

 

While a few non-profits might own businesses that are unrelated to their mission, merely to use them as an income stream, most non-profits that own for-profit businesses develop those enterprises to benefit the overall mission through parallel or complementary activity. These are known as non-profit/for-profit hybrids.

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Here are five reasons why a non-profit might consider doing this hybrid activity:

 

  1. Liability. Some of the activities that act as a revenue stream, activity, resource, or channel through which customers/clients/stakeholders are reached creates some form of liability for the non-profit that would best be handled in a legally separate manner from the main business.
  2. Something that is saleable that has a market (supporting mission). A non-profit's mission often fills a need where those receiving the services cannot pay full market rate (or even cover basic costs). In order to deliver the service, the non-profit develops another product or service that does have market value. Because of economies of scale, it is more beneficial to the non-profit to sell the service where the market can bear it and give it away where the market cannot, in two different target market segments. This allows for the need to be met and those who can afford to pay based on value help to carry the cost for those who cannot.
  3. Revenue stream from an under-utilized resource. Sometimes the non-profit has an under-utilized resource that has certain fixed costs to maintain. Creating a for-profit business to use the resource, while creating a revenue stream for its maintenance, offsets costs while increasing exposure for the non-profit. Organizations with under-utilized buildings put coffee shops or other retail space in part of their storefront or office in order to help offset building costs.Financial Roles Get the map!
  4. Branding. Sometimes, a non-profit's mission is narrow enough that adding a for-profit arm, while helpful from a revenue standpoint, or from an economy of scale standpoint, is desirable, but some degree of separation is required from the main brand. A for-profit business (rather than just a single non-profit with unrelated business income) makes more sense.
  5. Clarity of mission. The same thing applies when looking at things from a cost perspective - costs in time, personnel and finances. Having a separate business clarifies what is core mission and what is supporting core mission. That way, the non-profit can focus on its work, while the for-profit business becomes more distinct and required to stand on its own feet, rather than drawing down resources from the non-profit to stay in business.

Is your business considering forming a non-profit? Is your non-profit considering forming a business? I'm interested in hearing your story! Click the button below to set up a time to talk.

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Topics: nonprofit sector, steward leaders, Matthew Thomas, steward leader, non-profits, non-profit, non-profit/for-profit hybrid