Social enterprises “are businesses that use entrepreneurial methods to accomplish social goals and/or fee profits to a parent charity or non-profit to enable it to fulfill more of its own social mission. They are revenue-generating businesses with primarily social objectives whose surpluses are reinvested for that purpose in the business or in the community, rather than being driven by the need to deliver profit to shareholders and owners.”

While some non-profits allow their social enterprises to run directly out of their non-profit organizations, JFCAC made the decision to put avenues in place that would protect the assets of its non-profit status from the potential liabilities of any of the earned income from its for-profit endeavors. One of the accepted ways in which to do this is via the establishment of a C- Corporation with the non-profit serving as the sole shareholder. A C-Corporation is an entity recognized under U.S. federal income tax law as a corporation that is taxed separately from its owners / shareholders. In order to proceed, JFCAC engaged legal assistance to develop a C- Corporation, envisioning that future social enterprises would be set up as single-member limited liability Companies (LLCs) operating as subsidiaries of the C-Corporation. A Single Member LLC is a limited liability company having only one member. The member of an LLC is the owner of the LLC. They are equivalent to partners in a partnership. A single member LLC is taxed as a sole proprietorship. The established structure is depicted below.

For purpose of clarity, the IRS Ruling on these issues is as follows: “While 501(c)(3) nonprofit organizations are generally exempt from federal income tax, they may be liable for unrelated business income tax (UBIT) on the income generated from activities that are not related to their exempt purposes. The purpose of UBIT is to ensure that tax-exempt organizations do not have an unfair competitive advantage over for-profit entities when a tax-exempt organization engages in commercial business activities. While the non-profit organization could generate income from unrelated business activities and simply pay any UBIT incurred, at some point, the activity may become so substantial that it could jeopardize the tax-exempt status of the nonprofit organization. Since there is no bright line rule for how much unrelated business activity the Internal Revenue Service (IRS) considers too much for the nonprofit to operate, moving those activities to a separately-incorporated, taxable legal entity, such as a C-corporation subsidiary, can avoid concerns about crossing that line. The nonprofit carries out the activities in a separate but related entity, which will pay income tax on the net income from the activities and which can then remit the after-tax profits as a dividend or as a grant to the nonprofit parent. Dividends received by tax-exempt organizations are considered passive income, and not subject to UBIT. Note, that when choosing a taxable entity for the profitmaking business, it is important to ensure the entity is not considered “pass-through” for tax purposes. Activities of pass-through entities, such as partnerships, limited liability companies (LLCs) and S-corporations, are generally attributed to their owners. Further, single-member LLCs are generally disregarded for federal tax purposes. The IRS will attribute the profit-making activities carried on by the pass-through entity to the activities of the nonprofit owner, which undermines the tax purpose of creating a separate for-profit subsidiary.” (Quoted from the IRS Website)

The mission of JFCAC is to serve individuals and families through partnerships, empowerment, and education in order to strengthen and improve the entire community. It was determined, while in the planning phases, by JFCAC’s Executive Team and Board that all subsidiaries created by JFCAC’s C-Corporation needed to remain in line with its mission as much as possible.