Nonprofit and For-Profit Interactions
Nonprofit and for-profit organizations often work together for the good of the community, but it’s important to understand the guidelines surrounding nonprofit and for-profit interactions to reduce risk to both entities.
Purpose of nonprofit and for-profit entities
The first thing to keep in mind is that the purpose of a nonprofit entity is to reduce the burden on the government, which is the reason that nonprofits are granted tax-exempt status. A nonprofit’s goal is to benefit quality of life, whether at the local, state, national, or global level. This might include helping children or animals, aiding the poor or distressed, or providing arts and culture enrichment to the community. Because of their tax exempt status, nonprofits are required to follow rules related to use of funds.
In contrast, the purpose of for-profit businesses is primarily to earn money for the owners and stakeholders of the business. The government has an interest in being sure taxes are paid on all assets of these for-profit businesses, while also ensuring they’re not benefiting from funds donated for nonprofit use.
Guidelines for use of funds
Because of the difference between the two organizations and their tax status, there are strict guidelines around how money is spent and who can benefit from nonprofit funds. The general rule is that you cannot take dollars designated for a charitable purpose and use them to benefit a for-profit organization or individual.
When a for-profit company donates to a nonprofit, benefits can flow from the for-profit to the nonprofit in any way they choose. This may include donations of money, time, office space, employee volunteer hours, or goods and services.
However, as soon as funds or benefits begin to flow backward to the for-profit business, it creates risk for both entities. The only legal way money or benefits can go from the nonprofit to the for-profit company is through a documented contract for goods or services priced at or below fair market value.
When the basic rule is broken and a business or individual receives a benefit from a nonprofit, there is risk to all parties involved. The nonprofit side risks being audited, losing their tax-exempt status, and receiving sanctions personal to each director who approved the transaction. The for-profit business or individual risks penalties or taxes that can be up to 200% of the value received by the for-profit or individual receiving the benefit.
“The best way for the board to protect the nonprofit, themselves, and companies they do business with is to have the right policies in place.”
Best practices to reduce risk
The best way for the board to protect the nonprofit, themselves, and companies they do business with is to have the right policies in place, including a conflict-of-interest policy, and to follow those policies.
A common situation for board members to navigate is when their for-profit business or one they are affiliated with wants to provide services to the nonprofit. If a nonprofit wants to contract with a board member’s company for needed services, they should follow their conflict-of-interest policy and ensure all appropriate steps are taken to document the agreement and ensure there is no excess benefit to the board member or their company.
A well-written conflict-of-interest policy will require the organization to get bids or information that shows fair market value of goods or services rendered and will require a vote to be taken and recorded in the meeting minutes for the chosen bid. The nonprofit should also be aware of Form 990 reporting requirements related to the nonprofit doing business with a board member’s company.
If a for-profit business is creating a nonprofit entity to do charitable work, they need to define their relationship clearly in policies and documents and then be sure to follow those guidelines. If a company wishes to give scholarships to their employees or employees’ family members, they should set up a private foundation under which to give the scholarships rather than a 501(c)(3) charitable organization.
When it comes to money, nonprofit and for-profit interactions must be navigated carefully. It’s essential for nonprofit organizations to follow best practices regarding flow of funds and benefits to reduce risk to their organization, their donors, and their board members.
