Sector-Switching: Two Groups Make the Change From For-profit to Nonprofit

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August 21, 2013; J. and the Star Tribune (Minneapolis, MN)

NPQ has been tracking shifts made by organizations from one sector to another—as, for example, in the case of health insurers looking to go for-profit—and instances where they overlap in practice, as in independent bookstores now fundraising to survive or expand.

On the IRS’s list of recently-approved nonprofit organizations are two agencies previously incorporated as for-profit companies: J., a media outlet also known as the Jewish News Weekly of Northern California, and Hold Your Horses, an organization which provides equine-assisted occupational and physical therapy. Both companies converted to nonprofit status in order to open up additional streams of revenue.

Like many news companies around the country, J. was feeling a financial squeeze. According to J., “Industry pressures have affected [us] in recent years, and we have been forced to constrain our efforts, even as our community continues to flourish. The ability to take in tax-deductible contributions will allow us to serve you [the reader] better by investing more in reporting, distribution and new media.”

Hold Your Horses was also feeling a squeeze. It was founded in 2006 as a limited liability company (LLC) to provide physical and occupational therapy primarily to children with disabilities. From the beginning, the owner, Janet Weisberg, has offered sliding-scale fees to accommodate families who could not afford and whose insurance did not cover the services. For Weisberg, the company was about following her passion for horses and an opportunity to work with children with disabilities.

Hold Your Horses’ conversion from for-profit to nonprofit began in 2011 and took seven months at the federal level and eighteen months at the state level. Weisberg indicates that operating as a nonprofit has already opened new sources of funding. In 2012, Hold Your Horses received $165,000 in fees, contributions, and grants. On October 6, they will host a fundraising event, complete with a cowboy singer and a petting zoo—the kind of event a for-profit, arguably, does not operate.

There are a number of reasons why for-profit companies might switch to nonprofit or hybrid status: to secure additional funding such as grants, donations, and program related investments; to be able to solicit tax-deductible contributions; to focus constituents’ attention on the cause; and to more easily access volunteer labor, among others.

NPQ would love to hear about readers’ experiences with, and comments about, these kinds of shifts! —Jennifer Amanda Jones

  • Karin B. Baird, PhD

    Sector switching, or the creation of hybrid organizations poses a real threat to thousands of small, local nonprofit organizations that don’t just struggle for funds from individuals and grants from funders. They also compete for these resources. It is no secret that as nonprofit organizations grow, and resources become more plentiful, waste and fraud are more likely to occur. When we learn about the violations that have been committed inside large nonprofit organizations, they are inevitably focused on the misuse of financial resources.

    When the IRS began taking steps to monitor nonprofit organizations by requiring them to annually reveal financial information on the 990 reporting form , these steps were taken to provide oversight over the finances of nonprofit organizations. Today, more than half of the states have implemented their own oversight regulations to ensure money that flows into and through nonprofit organizations is being managed and used legally and ethically to further their organizational missions.

    Publications like the Nonprofit Quarterly , The Nonprofit Times and other organizations including the news media also monitor nonprofit organizations by exposing misuse of funds and fraud. Recent examples include expose articles on organizations that spend hundreds of thousands of dollars on marketing and fundraising while using only a small percentage of the funds they receive to help and provide the services they say they provide for others. The exposure of these large organizations is a reminder to donors that if they are wary of large nonprofit organizations, there is good reason to think twice about where they send their tax deductible donations.
    For-profit organizations that are switching to the nonprofit sector may or may not be large organizations and they may or may not be well off financially. The real question that needs to be asked is whether they are switching to the nonprofit sector to become an organization with a more socially oriented mission, or are they switching because they see opportunities in the nonprofit sector to broaden the spectrum of financial resource opportunities. And while we won’t have answers to these concerns until more data can be collected as this trend continues, there are ways that donors and funders can ensure that their donations to tax-exempt organizations are being managed well and used for the public good. One way to do this is to give to local established organizations with a history of commitment to their communities.

    In some cases this may mean giving to established nonprofit organizations in communities that do not have ties to large national level organizations, where their sole focus is and has been on local needs. Another may be to support hybrid organizations that are also locally based with a previous history of giving to their communities. The challenge as sector switching continues is for established nonprofit organizations to use their track records, program data, and the knowledge and skills they can muster to be increasingly competitive when it comes to fundraising, grant writing and working with both foundation and corporate representatives to make their case for the need for funds. But so will hiring experienced and trained fundraising and grant writing professionals, and those with education and training in the management and administration of nonprofit organizations.

    Karin B. Baird, PhD
    Assistant Professor and Acting Director
    Master of Science in Nonprofit Management degree program
    Spertus Institute
    Chicago, IL.

  • Rusty Stahl

    Dr Baird makes excellent points. It seems to me that perhaps the animal organization should have been a nonprofit from the beginning, given its social mission and nature. Perhaps the entrepreneurial founder was unaware of the opportunity or appropriate benefits?

    It has always seemed to me that the professions — journalism, medicine and to some extent legal practice — naturally belong more in the nonprofit sector than the for-profit arena, given their public service purposes. I always think its interesting how schools, hospitals and media outlets can be and are housed across the nonprofit, for-profit and (at least the former two) government sectors. I think the public might be better served with information/conversation, health, and education if more of these professions were fully anchored in the social sector or government, rather than pressured to turn a profit at the expense of their values and ethical mandates.

    Having said all that, I agree that it could be dangerous for for-profits to turn into nonprofits for the primary purpose of competing with “real” nonprofits for grants and donations.

    Rusty Stahl
    Director, Talent Philanthropy Project
    Visiting Fellow in Residence, NYU Wagner’s Research Center for Leadership in Action