Zyzyrgy Group

Not-for-Profit and Personal Franchising (MLM) – The Perfect Match?

We think so!

For the latest opportunities for Not-For-Profits, Ministries and Churches go to:

Solutions for NFP, Ministries and Churches

Overview

Many Not-for-Profits and Personal Franchisors are overlooking one of the best opportunities available to them. For the Not-For-Profits it is increasing their funds and for a Personal Franchisor in growing their businesses. Not for profits are already focusing on building and developing their communities. It is great opportunity to promote sales through your local nonprofit or charitable organizations in your area. The Personal Franchise Owner makes money and so does the Not-for-Profit organization.

There are many misconceptions about Not-for-Profits as well and Personal Franchising using MLM or Party Plan opportunities. Partnering the two can be solutions for both. Handled correctly, the benefits of a business owner’s involvement with an NPO are mutual and substantial. The tax-exempt organization receives a source of funds that are necessary to carry out its functions and to support the causes that are deemed worthy enough for tax-exempt status. The network marketing company gains access to a potentially large and motivated customer base.

Overnight, the membership of a charitable organization may become an instant sales organization of hundreds of thousands. The charitable organization raises these funds for worthy causes and a network marketing company finds a new market for its products, it is a great match!

The organization can also use it for education - serve first and benefit later. Many organizations have false hopes because some of the industry in the past focused on chasing money. If money is all you are chasing, we have seen many “dead bodies” as a result. The same tool can be used if managed properly to “raise bodies” by using the teaching of many of the religions to serve first giving people an opportunity to learn and give and the money and joys will follow. This is especially true if one follows their passion, gives and then one will receive.

We are seeing more and more Personal Franchisors creating special department just to support distribution agreements with Not-for-Profits. Your Travel Business (YTB) is a great example. A school, church or local charity can place a link for travel on their website and in their mailings. Who doesn’t travel? Why not support your local charity by booking the travel through your organization of choice and having some of the profits go to them? In many cases the cost is similar or less then the costs found elsewhere for the same product or service – and you get better customer service.

Use of charitable organizations for network marketing distribution can work like this:

Not-For-Profit Registers as a Distributor

The charitable organization signs on as a network marketing distributor. The charitable organization in turn sponsors its membership as independent distributors. The charitable organization sells products and profits. If the new relationships believes it is going to make a significant amount of money over $????, we suggest the formation of a wholly-owned "for profit" corporation for the new activities to separate the funds incase it grows to a point where it might jeopardize you not-for-profit status.

Not-For-Profit Promotes a Distributor

The charitable organization promotes on their website and gives access to the not-for-profit members and community for recruitment and sales, and to encourage voluntary contributions back from the Distributor.

One Time Promotion

The charitable organization promotes on their website, newsletter or other word-of-mouth means to their community for the sales of a product or service and period of time and the profit or percentage of profits will go to the organization.

Use of tax-exempt organizations for personal franchise owners and the not-for-profit can be a great benefit for all of the parties involved. The most important advice that can be given, however, is that the company, the personal franchise distributor, and the tax-exempt organization should be fully briefed by professional tax, accounting and legal advisors on the requirements as well as the tax ramifications and legal aspects of the relationship.

Tax-Exempt Status

According to my knowledge, a not-for-profit can engage in profit making activities. The only requirement is filing a 990-T and paying tax on the non exempt activities. As far as I know it doesn’t affect the non profit status, unless the non profit functions are abandoned. The extent to which a tax-exempt organization may engage in income-generating activities without jeopardizing its exempt status is something that is different for every organization. We suggest you talk to a specialist in this area that truly understands this area. It is difficult to find them. We suggest contacting Ellis CPA Firm PC by going to www.elliscpafirm.com.

There are two possible consequences to an organization conducting a trade or business. First, the organization may be subject to unrelated business income tax. In addition, the organization may be denied tax-exempt status entirely if the trade or business is carried on to such an extent that it constitutes the primary purpose of the organization.

Caveat for Tax-Exempt Organizations

A tax-exempt organization, acting as an actual distributor of products or services, disseminated through a network marketing arrangement, is clearly engaged in a trade or business. In general, there is little relationship between the tax-exempt purposes of the organization and the products that are being sold. Finally, the duties of the charitable organization and its distributor are typically ongoing rather than sporadic. Therefore, income of an exempt organization derived from network marketing distributor activities will be subject to unrelated business income tax. Network marketing companies' distributors who sign up charitable organizations should be careful to point this out to the charitable organizations when they sign up as distributors.

The charitable organization should also be careful not to allow the network marketing distribution activity to endanger its tax-exempt status altogether. Under § 501(c)(3) of the Internal Revenue Code, tax-exempt organizations must be organized and operated "exclusively" for nonprofit purposes. The IRS has interpreted this provision to mean, however, that an organization which engages "primarily" in activities that further its exempt purposes will be considered to be operating "exclusively" for exempt purposes. However, the operation of a particular activity may jeopardize the organization's exempt status if the activity is more than "insubstantial" in comparison to overall organization activities. Unfortunately, few cases discuss or define "substantial" in quantifiable terms. In one recent case, the Tax Court held that a tax-exempt organization, which derived more than 25 percent of its revenue from a business activity, was "too substantial" and thus it was denied its tax-exempt status. It is unclear from the opinion whether 25 percent is the "high water mark" to be applied in all cases or merely the line applicable to the particular facts in the individual tax case. Without further guidance, charitable organizations, which are engaged in network marketing activities, must carefully monitor their activities to assure that the activities do not become "too substantial," although just what constitutes "too substantial" is as yet unclear.

Wholly-Owned Profit Making Subsidiary

The least risky method of collaborating with an NPO is through the establishment of a wholly-owned subsidiary corporation to engage in business on the NPO's behalf. This corporation could be signed on as a distributor in the same manner as any individual. The corporation would be taxable on its income. Dividends paid by the subsidiary to the tax-exempt parent, however, would not be unrelated business income to the parent by virtue of § 512(b)(1) of the Internal Revenue Code.

IRS letter rulings to tax-exempt organizations desiring to do business, indicate the appropriate business structure for such an arrangement. In the private letter ruling, a tax-exempt organization began operating as a distributor of a food product and enjoyed some success in the next year. The organization did not want to jeopardize its exempt status. Therefore, it set up a wholly-owned taxable subsidiary to act as distributor of the food product, and the exempt organization would be paid through dividends. The IRS stated that for federal income tax purposes, a parent corporation and a subsidiary are considered separate taxable entities, so long as the subsidiary has a legitimate business purpose and the parent corporation does not completely dominate the day-to-day management of the subsidiary. In that § 512(b)(1) of the IRC excludes dividends from the definition of unrelated business taxable income, the dividends would not be taxable.

Unrelated Business Income

The Internal Revenue Code imposes a tax on the unrelated business income of otherwise tax-exempt organizations. "Unrelated business income" includes income derived by an organization from any unrelated trade or business regularly carried on by it. However, the first $1,000 of "unrelated business income" is not subject to tax. It ought to be noted, however, that an exempt organization is entitled to only one $1,000 deduction regardless of the number of unrelated businesses in which it is engaged.

The IRS has been fairly generous in terms of exempting unrelated business income of charitable organizations when the business activity is engaged in only discontinuously or periodically, for instance, for a period of a few weeks per year. For instance, the IRS regulations specifically provide:

"[c]ertain intermittent income producing activities occur so infrequently that neither their recurrence nor the manner of their conduct will cause them to be regarded as trade or business regularly carried on. For example, income producing or fund raising activities lasting only a short period of time will not ordinarily be treated as regularly carried on if they recur only occasionally or sporadically. Furthermore, such activities will not be regarded as regularly carried on merely because they are conducted on an annually recurrent basis. Accordingly, income derived from the conduct of an annual dance or similar fund raising event for charity would not be income from trade or business regularly carried on [emphasis added]."