Non-Profit Legal Issues: Profit-Seeking Activities

Non-Profit Legal Team Setup from The Startup Garage
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Since non-profits are established with a specific promise to return the profits into the organization and to not pass them along to any officer, director or employee of the organization, some financial transactions are bound to raise a red flag or be a cause for a non-profit to lose access to federal grants, community donations, and tax exemption.  These transactions fall into two categories.

Private Benefit/ Inurement

  • While directors and staff employed by a non-profit have a right to a reasonable salary, anything beyond what is considered reasonable, even if it’s not a monetary compensation, is considered to be an inappropriate and illegal appropriation of non-profit funds.  This category includes the crime of embezzlement.

Unrelated Business Income

  • A non-profit could stand to lose its 501(c)(3) tax-exempt status if it has too much income generated from activities or trade that are regularly carried on and are unrelated to the exempt function of the organization.
  • If your business plan includes regularly carried on trade or business from which you would like to retain a profit, you can consider structuring your business as a social enterprise rather than a non-profit.  California recently introduced two “hybrid” corporate forms for social enterprises: flexible purpose corporations and benefit corporations.  The Startup Garage has helped several social enterprises begin their businesses – please look through The Startup Garage’s web site for more information on beginning a social enterprise.


Whether you have a question about Non-Profit Legal Issues, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!
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About Tyler Jensen

I work with entrepreneurs who are looking to attract investment and get out of the "Garage". I am passionate about helping entrepreneurs start companies that matter. I helped launch over 100 Companies, Non-Profits and Social Enterprises. I consider myself a serial entrepreneur, startup coach & trusted advisor. * Launching New Companies (For Profit, Non-Profit and Social Enterprise) * Expert Business Plan Writer * Extensive Network of Business Relationships focused on Launch & Rapid Growth of New Companies * Startup, Growth, Marketing, Technology, Web, Business Systems * Trusted Advisor to CEO’s & Entrepreneurs * Capital Raising Strategy Development * Startup Team Development The first company I started and sold is VAVi Sport & Social Club which grew to over 25,000 members in six years, was recognized as San Diego’s 30th fastest growing private company in 2006 by the San Diego Business Journal and 32nd fastest in 2007, and sold for over 25X the capital investment.