united-states tax-law corporate-law new-york-state non-profit
Can 501(c)(3) nonprofits sell goods and services like a for-profit?
<p>United States/NY state here.</p>
<p>I would like to form a business entity whose primary purpose will be helping the public at large with a very specific charitable cause. This will be a 501(c)(3) charitable nonprofit. However I would like to sell a variety of goods and services, so as to raise money to fund our charitable activities. Things like coffee mugs, t-shirts and other kits related to our cause that the public-at-large might be interested in buying.</p>
<p>Are 501(c)(3) nonprofits allowed to sell goods and services to the public (like any other for-profit would)? Provided that the proceeds/revenue from said sales is actually put to good use? Or do nonprofits need to perform financial gymnastics, such as owning, say, a C-corp or S-corp that does that sales, and passes the dividends back to the nonprofit, etc.?</p>
<p>If nonprofits are <strong>not</strong> allowed to sell goods and services, where is this documented and what are some legal gymnastics I could finagle to get my desired outcome?</p>
<p>And if they <strong>are</strong> allowed to sell goods and services, what constraints, regulations, restrictions, etc. apply?</p>

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<p>Are 501(c)(3) nonprofits allowed to sell goods and services to the public (like any other for-profit would)?</p>
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<p>Yes. The sale of goods and services as you describe it does not sound in violation of <a href="https://www.law.cornell.edu/uscode/text/26/503" rel="nofollow noreferrer">26 USC § 503</a>.</p>
<p>However, the 501(c)(3) tax-exempt entity would need to pay tax on income earned from those sales. Per <a href="https://www.leagle.com/decision/19861309475us83411272" rel="nofollow noreferrer"><em>U.S. v. American College of Physicians</em>, 475 U.S. 834 (1986)</a>, using that income to advance the purposes for which the entity was created does not <em>necessarily</em> qualify the activity or sales as &quot;<em>substantially related</em>&quot; to entity's said purposes. An exemption thereto &quot;<em>depends <strong>in each case</strong> upon the facts and circumstances involved</em>&quot;, <em>Id. at 843</em> (citing Treasury regulations, emphasis added in the court opinion).</p>
<p>Based on the information you provide, it seems unlikely that the sale of products as generic as coffee mugs or t-shirts would qualify as <em>substantially related</em> to the performance of charitable purposes of your organization.</p>
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<p>do nonprofits need to perform financial gymnastics, such as owning, say, a C-corp or S-corp that does that sales, and passes the dividends back to the nonprofit, etc.?</p>
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<p>No. In fact, doing it for purposes of being exempted from income tax on those sales would be tantamount to &quot;<em>to carry[ing] on full-fledged commercial enterprises in competition with corporations whose profits were fully taxable</em>&quot;, <em>Id. at 838</em>, which is what prompted &quot;<em>Congress to restrain the unfair competition fostered by [former] tax laws</em>&quot; (brackets added).</p>
