Tuesday, January 26, 2010

"UBIT" off more than you can chew, the Social Venture Quandry

Ok, I admit, that's a horrible play on words above, but it's the reality of the situation. The Unrelated Business Income Tax (UBIT) stymies the entrepreneurial spirit of the nonprofit sector and is so entrenched, yet so misunderstood by even seasoned tax workers.

The landscape of nonprofits within the United States has transformed from religious base charities providing alms to the poor to sophisticated multi-million dollar organizations networked across the nation. No longer are these entities looking to hold golf outings and galas to raise their revenue, rather they are building and leasing structures for an NFL[1] team while churches “are opening restaurants, private gyms, and even [a] Starbucks coffee franchise.” [2]

The desire and necessity to diversify revenue streams in order to serve their mission has evolved nonprofit leaders into becoming social entrepreneurs.[3] The idealists of these innovative revenue generators view it as an organization embracing its mission; others see elements of both nonprofit and for-profit activities. Social entrepreneurship, defined as the “double bottome line,” requires nonprofits to financially sustain and have a greater impact on their mission by applying and operating with entrepreneurial strategies.[4]

These same social entrepreneurs are entering a field where they look upon the law as irrelevant to their endeavors, when they should be guiding their social enterprises according to the exisiting laws.[5] The controlling law, the Unrelated Business Income Tax (UBIT), taxes the income gained from activities unrelated to the mission of the exempt organization. Struggling nonprofits envision that turning to a social venture will be a quick fix, but often the entity needs to be structurally re-adjusted to conform to nonprofit standards, let alone for-profit elements.[6]

When the question of unfair competition is poised to the nonprofit sector as a roadblock to social ventures, their initial reaction is that small businesses and the government still have a perception that they either pay below market wages or volunteers do all of the work. According to Jed Emerson, Director of the Homeless Economic Development Fund, four main elements should be taken into account before accusations are established[7].

1. Non-profits pay market-based wages or above and therefore can not use “profits” to undercut the market,
2. Significantly increased training, supervision and other costs associated with the employment of individuals whom the mainstream labor markets will not employ[homeless, drug/mental/emotional problems, etc], leaves non-profit businesses at a competitive disadvantage,
3. Because of their community and public service missions, non-profits must consider more than just their own bottom line; they must keep a constant eye toward the broader social mission of the non-profit,
4. Non-profits are disadvantaged because their sources of funding are more limited than those available to for-profit businesses.[8]

The effect of globalization that has exploded within the last two decades has propelled the field of social entrepreneurship to the front of the pack, where “that magic moment when an idea, trend, or social behavior crosses a threshold, tips, and spreads like wildfire,” as the nonprofit sector works to incorporate for-profit business practices within their organizations.[9] Nonprofits survival in the 21st century depends not on charitable donations, but a necessity to evolve into a hybrid social venture, whereas they receive limited charitable tax benefits, enjoy the flexibility of operating like a business and continue to engage the general consumer as a customer first and a donor second.

[1]Baptist Hospital, Nashville’s largest nonprofit hospital, built a $15 million office and training complex to rent to the Tennessee Titans professional football team, partly for the revenue, but also for the marketing opportunities”

[2] John D. Colombo, Commercial Activity and Charitable Tax Exemptions, 44 Wm. & MARY L. REV. 487, 489 (2002).

[3] Gail A. Lasprogata, Marya N. Cotten, Contemplating “Enterprise”: The Business and Legal Challenges of Social Entrepreneurship, 41 Am. Bus. L.J. 67, 68 (Fall 2003).

[4] Id. at 68-69.

[5] Id. at 70.

[6] Id. at 69.

[7] Heather Gottry, Profit or Perish: Non-Profit Social Service Organizations & Social Entrepreneurship, 6 Geo. J. on Poverty L. & Pol'y 249, 258 (Summer 1999).

[8] Id. at 258-259.

[9] Janet E. Ker, Sustainability meets Profitability: The Convenient truth of how the business judgment rule protects a board’s decision to engage in social entrepreneurship, 29 Cardozo L. Rev. 623, 629-630 (November 2007).

No comments:

Post a Comment