Do you Need a Separate Entity to House Your Revenue-Generating Program?
To avoid jeopardizing their tax-exempt status or to limit liability, associations sometimes structure their revenue-generating programs and services as separate entities. A nonprofit attorney offers insights into when to consider going that route.
When thinking about nondues revenue, many associations are primarily concerned about how to make more of it. However, once an association has a great idea in hand, it may want to consider housing that revenue generator in a separate entity, said Carrie Garber Siegrist, an associate at Faegre Baker Daniels LLP, at last week’s ASAE Annual Meeting and Exposition.
During her session “Creative Legal Structuring for Revenue-Generating Opportunities,” Siegrist offered a peek into what to do to ensure the maximum amount of revenue makes it to an association’s coffers when it has great revenue-generating ideas.
“When we talk about revenue generation, we are talking about something that is really important to the success of your organization,” said Siegrist. “Sometimes, that means pulling it out of the organization.”
Because the U.S. tax law is expansive, there are a multitude of factors that might cause an association to create a separate entity for its revenue-generating services. For example, separate entities allow associations to provide services that might otherwise jeopardize their tax-exempt status or increase their liability.
Siegrist said asking some questions can help associations determine if the revenue-generating product or service is something that needs separate entity. “Is there something within the tax status that is keeping you from pursuing this idea?” she said. “Is it entirely fed through your existing association revenue, or is this going to generate some fees? Is it related to or unrelated to your purposes [as a nonprofit]?”
Tax-exempt status is given to nonprofits with specific IRS-defined “purposes,” so revenue generated outside that purpose is subject to unrelated business income tax (UBIT).
Revenue-generating programs and services that associations sometimes house separately include licensing deals and consulting services. Siegrist said the single member LLC is a popular offshoot entity used by nonprofits.
“Some organizations have used the single member LLCs to drop consulting services that are related to their purposes into a separate entity so that they are not sued by someone who doesn’t like what they told them to do,” Siegrist said. “Some organizations have housed intellectual property into single member LLCs.” In one example Siegrist offered, an association used an LLC to license its conference model to other organizations.
In addition to the single member LLC, other legal structures available include fiscal sponsorships, taxable for-profit subsidiaries, and contractual affiliations. The legal structure an association picks will depend on what type of revenue generator it’s developing. “Your legal structure options should never be telling you how to implement something,” Siegrist said. “This should not be the driver of what you’re doing. This should be a tool to allow you to do it.”
While Siegrist advocates for using a new legal entity at times, she also notes that new structures aren’t always necessary. “If this is something that … doesn’t have much risk and fits squarely in your purposes, then let’s not have a new structure,” she said. “Just keep it where it is.”
Finally, Siegrist told attendees not to be frightened off by taxes. In her practice, nonprofits would regularly ask her to review revenue-generating ideas, such as corporate sponsorship agreements. At times, she would say the deal looked great, but if she mentioned organizations might incur UBIT on the profits, they’d balk.
“Don’t be afraid of paying a little bit of tax on something if it’s really going to generate some revenue—because you can pay that tax,” Siegrist said.
Have you created a new entity to house a revenue-generating program? Tell us about it in the comments.
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