Third Dimension – Making A Profit As A Not-For-Profit: Undertaking Commercial Activities

March, 2016

By Elizabeth Lathlean, Associate

Whilst a not-for-profit does not operate for the profit or gain of its members, it is permitted to generate a profit in undertaking its activities, in line with its stated purposes.

With changing practices in giving and an increasing lack of certainty around regular funders, an increasing number of not-for-profits are looking to undertake commercial activities as a way of generating income, and enabling the continued provision of services.

Commercial activities are those activities involving transactions (sales and purchases at a fee), generally with the aim of providing goods and services to businesses and individuals.

A not-for-profit is permitted to engage in commercial activities, as long as those activities are undertaken with the aim of advancing the organisation’s purposes (as outlined in its governing document). For a charity registered with the Australian Charities and Not-for-profits Commission, such charitable activities need to align with the organisation’s charitable purpose(s).

For charities, there are four main ways they may carry out commercial activities in line with their charitable purposes. These are:

(a) Commercial activities directly carrying out charitable purposes – where a charity carries out commercial activities as part of its charitable activities, and these activities directly relate to its charitable purposes;

(b) Commercial surplus used to further charitable purposes – where a charity undertakes commercial activities with the aim of generating a surplus, which will fund its charitable activities;

(c) Intrinsically charitable activities carried out in a commercial way – where a charity’s activities are intrinsically charitable but carried out in a commercial way; and

(d) Commercial activities incidental to charitable purposes – where an organisation’s commercial activities are only incidental to its primary stated purposes.

There a number of factors to consider in determining whether it is appropriate to undertake commercial activities. Some of the main considerations are outlined below.

Step 1: Know Your Organisation’s Purpose

Review the objects clause of your organisation’s governing document and ensure it accurately reflects your organisation’s purpose and activities.

It is common for organisations to depart from their originally determined path, and this often results in the objects, activities and operations practised by the organisation being out of sync with those stated in its governing document. Some key questions you should ask at this stage include:

(a) What sort of activities does your organisation engage in?

(b) Who are the members and / or beneficiaries of your organisation?

(c) Does your organisation’s objects clause accurately reflect these?

If no, your organisation may need to consider revising its governing document. If yes, proceed to Step 2.

Step 2: Different Commercial Legal Structures

There are a range of different options and legal structures that you can utilise to undertake commercial activities, in line with your stated purposes.

(a) Consider entering into a collaborative arrangement with an existing organisation. Some useful matters to consider include:

i. Are there other organisations or businesses with a similar purpose and social concern?
ii. What products or services does your organisation rely on to survive?
iii. Would it be possible to enter into a collaborative arrangement with current suppliers?
iv. What can your organisation offer other businesses and / or organisations?
v. How can your organisation make the most out of a collaboration?

(b) Consider integrating commercial activities into your organisation’s current structure. Some useful matters to consider include:

i. Does your organisation already provide products or services to its members / beneficiaries?
ii. Would it be possible to start charging for these products or services?
iii. Would charging for these products or services compromise your organisation’s patronage or membership?
iv. What skills or expertise does your organisation already have?
v. Is it possible to use these skills to start providing goods or services at a cost?
vi. How can your organisation make the most out of its current structure?

(c) Consider starting up a separate entity. See questions above in relation to Step 2 (b). Some further matters to consider include:

i. What type of legal entity should your organisation establish?
ii. Will the new entity be a subsidiary company or a parent organisation?
iii. What skills will be necessary to set up the new entity?
iv. Can your organisation afford the start-up costs?
v. What relationship will the new entity have with your current organisation?
vi. What services or products will the new entity provide?

Step 3: Risks of Commercialising

(a) It is important to understand the impacts that undertaking commercial activities may have on your organisation in both the short and long term. Will commercialising affect your organisation’s current tax endorsements?

(b) What impact will commercialising have on current or future funding agreements, if any?

(c) What impact will commercialising have on your organisation’s ability to obtain future grants?

(d) Does your organisation already possess the requisite skills for new commercial activities, or will significant training / investment in upskilling or new hires be required?

Step 4: Costs of Commercialising

Before your organisation undertakes commercial activities, the costs involved in commercialising your organisation need to be considered. Matters to consider in this regard include:

(a) Will your organisation need to hire new employees? How will they be remunerated?

(b) Where will your organisation conduct its activities?

(c) Will your organisation be able to cover the start up costs?

(d) How might the use of your organisation’s surplus affect its current operations?

(e) What are the financial and other risks involved?

(f) If your organisation loses patronage, will the new commercial activities make up for the loss?

When undertaken appropriately, commercial activities represent an innovative and effective way for not-for-profits to generate income and ensure ongoing, high level service delivery.

This article originally appeared in Third Dimension – Summer 2016

Contact Mills Oakley

For more information, please contact:

vera-visevic

Vera Visevic | Partner
T: +61 2 8289 5812
E: vvisevic@millsoakley.com.au

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