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Turning a Non-Profit into a For-Profit

If your non-profit can advance its mission through increased investment and profit-making activities, it may be time to switch. In some states this is not yet an option, but there are other alternatives such as having a private subsidiary owned and operated by a non-profit.

Social enterprise is on the upswing. In 2008, Bloomberg Business Week reported that an estimated $7.3 billion was invested in 100 socially responsible alternative funds, $5-6 million of which was venture capital. With even major players like Kleiner Perking Caufield & Byers funding social enterprise, many non-profits are thinking about the ways that they might be able to expand and better fulfill their purpose with increased investment. While switching from non-profit to for-profit status will mean having to give up your organization’s tax-exempt status, there are a number of venture capital firms that focus on investments in social enterprise. The major firms include:

Bikestation provides a prime example by starting the for-profit subsidiary Mobis Transportation in 2008. The owners of the company saw the opportunity to increase its staff and expand its market with outside investments. While the non-profit, which creates and runs bike transit centers, now not only service cities and transit agencies, but also universities, corporate campuses, and other places.

The laws are also starting to reflect the desire for business owners to make a positive social impact while earning a profit. The low-profit limited liability company (L3C) is a new form of business now recognized in eight states (Illinois, Louisiana, Maine, Michigan, North Carolina, Utah, Vermont, and Wyoming). According to Wikipedia, an L3C is a hybrid between for-profit and non-profit that allows investments and simplifies IRS rules for program related investments. It was first adopted in Vermont in 2008 and is being considered in another ten states. The corporate constituency statute allows companies to consider the interests of non-shareholders (i.e. employees, the community) in its management’s decisions.

When considering the switch from non-profit to for-profit, it is important to know the policies regarding the organization’s assets. Blue Cross of California, which was one of the first non-profits to become a for-profit in 1993, was forced to use its assets to start two charitable foundations: Western Foundation for Health Improvement and Western Health Partnerships. Consumer groups and regulators argued that these foundations would be responsible for advancing Blue Cross’ mission of improving public health. The policies vary according to state, former non-profits are often required to give the state an amount of money equal to the value of the new company to compensates for taxes that previously went unpaid. Nonetheless, former non-profit executives still often receive huge payouts when the switch is made.

While Bikestation could be consistent in promoting alternative transportation by building and running bike transit centers after switching to for-profit status, many transitions are less successful. One example of this is CareFirst, which closed one of its HMOs and dumped thousands of the “more expensive,” sicker, policyholders from its rolls, placing them onto the state’s high-risk insurance rolls instead. As for-profit enterprise, insurance companies like CareFirst do not have to have the interests of the uninsured in mind when making policies but rather how it will allow them to better compete in the market.

When thinking about whether or not to turn your non-profit into a for-profit whether you sell fair trade products, develop clean technology, or create jobs in low-income areas, the most important thing to ask yourself is what is the mission of your organization and which structure will best facilitate its accomplishment. If you can expand your staff and market with extra money from venture capitalists and more people are able to benefit from your company’s products and services, go for it. But, if your company’s responsibility to shareholders is going to compromise your original vision, alienate donors or partners, and result in the loss of your tax-exempt status, you may want to reconsider.

Sources:

1) Bloomberg Businessweek: “Turning Nonprofits into For-Profits”

2) Social Edge: “Converting from Non-profit to For-profit Status”

3) Forbes: “Nonprofit to Profit: Free Money No More”

4) UMDNJ: “Blue Cross Blue Shield Conversions”

5) Bloomberg Businessweek: “More ‘Patient Capital’ for Social Ventures”

 
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