TANGO Partners Perspective – June 2021

Revisiting Opportunities For Unlocking New Revenue: 3 Practical Tips!

Written By: Ed Spinella
Partner – Murtha Cullina LLP

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A little over a year ago, our TANGO Partners Perspective highlighted various opportunities presented by the COVID-19 pandemic.  These opportunities included the exploration of new revenue generating activities.

As we anticipated, the pandemic expedited various clients’ exploration of said activities and several of these clients not only
survived the pandemic but emerged stronger and re-energized.  Due to prudent strategic planning, leveraging sound internal and external advice and, of course, some good timing, these organizations have emerged out of the other side of the pandemic with exciting new opportunities, born out of necessity and ingenuity.

This Partners Perspective passes along three practical tips that emerged from our clients’ challenges and successes in launching their new revenue generating activities. We have previously presented on the topic of Unlocking New Revenue (Click here to view). Time has not run out for you to responsibly explore whether new activities will help your organization generate additional revenue.

Invest in Human Capital, Then Leverage It

Traditionally, many nonprofits viewed directors solely as mission driven supporters or community liaisons who would attend the occasional board meeting, help coordinate fundraisers and perhaps cut a check towards the bottom line.  We have always believed that a director’s fiduciary responsibilities contemplate a greater investment and, moreover, that nonprofits must strive to recruit directors who bring their professional skills and connections to the table.

All of our clients who successfully launched a new revenue generating activity first strategically recruited directors who would bring their entrepreneurial and business management skills to their board.  Some of these directors were recently retired and were looking for an “encore opportunity.”  Other directors were looking to tangibly make the world a better place with their professional skills, understanding that the satisfaction achieved by such mission-oriented pursuits far transcends monetary rewards.

In addition to recruiting business savvy directors, certain clients hired full time staff to lead new ventures and business development activities.  These new hires tended to be people from the for-profit world with MBAs or business experience rather than clinical backgrounds. Many of these individuals had already tasted financial success but wanted “more.” Some clients adopted creative compensation arrangements to recruit these employees (catering to their business minded ethos).

Don’t Be Afraid of the For-Profit World

We have always preached that “nonprofit” is one of the most unfortunate misnomers of our modern parlance.  A “nonprofit” is a business and must make a profit to survive and continue to serve its mission.  We believe that nonprofits are always better off if they embrace this fact and, are even better off, if they understand that they can incubate their own for-profit business or collaborate with other businesses whether they’re nonprofit or for-profit.

Think you have a great idea for a commercial enterprise?  Great!  You may be able to form a for-profit subsidiary to protect your tax-exempt status and perhaps use the for-profit to recruit outside investors and/or compensate highly valuable employees whose compensation has been “capped” due to 501(c)(3) considerations.

Have a connection with a for-profit business and see a potential “win-win” partnership?  Excellent!  Collaborations between nonprofits and for-profits are not new.  The healthcare industry has cultivated joint ventures between nonprofits and for-profits for decades with great success.  The IRS has provided us with the “rules of the road” for these collaborations such that we can help you responsibly partner with a for-profit organization in a manner that won’t jeopardize your tax-exempt status while still providing a “win-win” for you and your for-profit partner.

Unrelated Business Taxable Income Isn’t Inherently Bad

For far too long, “nonprofits” have viewed unrelated business taxable income as a scarlet letter. We believe that it is better to have some unrelated business taxable income (UBTI) than none.  More specifically, we believe that generating UBTI means you are actively exploring new revenue generating activities.  Short of UBTI becoming a material percentage of your aggregate revenue and expenses (say over 20%, though the IRS has never drawn a black and white line) it will not jeopardize your tax-exempt status and there are no negative optics triggered by disclosing UBTI on your Form 990. Also, keep in mind that not all revenue generating activities will create UBTI – some revenue may still be program service income.

The key to responsibly generating UBTI is proper planning and coordinated communication with outside advisors (legal counsel and your CPA firm). In the “worst case” scenario, your UBTI generating activity becomes so successful that you are forced to spin it off into a for-profit subsidiary which can still issue dividends back to the 501(c)(3). That is a good problem to have!

Murtha Cullina LLP frequently helps clients explore these opportunities and navigate the nuances in setting up new revenue generating programs. We are a proud partner of TANGO and look forward to helping your organization achieve new successes.


Ed Spinella


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