Hybrid Business Models

Hi permie gang! I am looking to start a community based farm project with an integrated system of classes, community roundtables, potlucks and food waste diversion. I have a team of former farm coworkers together, one of who should be able to secure some friends and family funding.

We had been leaning towards a nonprofit model that tries to be as financially self sufficient as possible (Social Enterprise) and have been recommended by a local farmer that linked for profit and nonprofit entities might be the way to go. I also remember watching the Bill Mollison PDC video series where he discusses this briefly but had trouble finding more info on this (messaged Tagari and they said there was some info in the book... anyone know how thorough this is?). I found one post here where it mentioned a nonprofit contracting out classes to a for profit and and contracting the selling of its produce but that kinda just leaves me with more questions lol.

So I'm wondering if anyone here has or knows others who have done this, what the pros and cons are, if they have any tips. Also, anyone know a good lawyer with experience with this, if there are big legal limitations with this, etc? Would also welcome general war stories of farm nonprofits or having a public facing farm.

Cheers and Guten Kulturing!

I have a team of former farm coworkers together, one of who should be able to secure some friends and family funding.
We had been leaning towards a nonprofit model that tries to be as financially self sufficient as possible (Social Enterprise) and have been recommended by a local farmer that linked for profit and nonprofit entities might be the way to go.
So I'm wondering if anyone here has or knows others who have done this, what the pros and cons are, if they have any tips.
Also, anyone know a good lawyer with experience with this, if there are big legal limitations with this, etc?
Would also welcome general war stories of farm nonprofits or having a public facing farm.
Cheers and Guten Kulturing!

I think any answer to this question will be longer than "War and Peace"
Why funding from friends and family?
Any model has to be self sustaining financially, otherwise it just withers to death, at somebody elses expense.
I dont understand the legal questions?
What do you describe as 'war stories'?

My suggestion would be to talk with a local CPA as which route would be best money wise and tax wise.

What is a CPA  please?

John C Daley wrote:What is a CPA  please?

A CPA is a Certified Public Accountant.

I would like to chime in and recommend a consult with an attorney that is versed in business law, specifically the formation of non-profits in order to look at ways to reduce personal liability of everyone wanting to participate in this project. Nothing ruins cooperatives faster than poor or nonexistent operating documents. Look for somebody in the state you plan on operating in because rules change state by state (My partner is a practicing lawyer).

My experience has been that any attempt to link for -profit and not- for- profit entities (assuming tax exempt) invites special attention from the IRS.

just my opinion but sounds like you got all these big plans depending on other people for labor and money which might be good you won't know till it is or isn't.
I would suggest to start small doing what you can do. dont borrow money. if you do you owe someone and be under stress to pay it off while also trying to make improvements and provide for yourself.  contracting out. im not so sure about this either or putting on classes unless you are a true expert with proven practical experience and track record of success in some area that many others are not.
unless you have land and gardening or farming parifinalia already or even if you dont finding a niche crop or value added product you can produce would get you in better financial situation to fulfill your plans.
if you start by yourself others may come along to get involved with what your doing to work in a symbiotic type situation.

Hi Oliver, what a good question and wonderful intentions and ethics for your new enterprise. I have a few thoughts, experiences to share, and ideas for you.

Obtaining 501(c)(3) non-profit status in the U.S. is not as easy as it might seem. I'm currently serving on a board for a newly formed nonprofit that doesn't have (c)(3) status yet; plus, I also have nonprofit organizations as some of my accounting/bookkeeping clients. If you do proceed with this, you would certainly want an attorney licensed in your state to assist you. The executive director of the newly formed nonprofit actually IS an attorney, but not practicing, and they are not versed in nonprofit law. So after attempting to apply for (c)(3) status ourselves, the board agreed a nonprofit attorney made sense.

Just to be clear, to obtain (c)(3) status requires proof of a broad benefit to the larger community. Your educational plans could fit the IRS definition(s), but be mindful about this. In my corporate days, I was the Accounting Manager for many entities, one of which is a nonprofit whose stated mission is to support a specific neighborhood community. The attorneys who formed it knew it would not qualify for 501(c)(3) status and would have to be 501(c)(4) status - a foundation. Donations to a (c)(4) are *not* tax deductible, but donations to a (c)(3) *are* tax deductible. (Which might be moot with some of the tax changes in 2020, but that's for another discussion.) See also nonprofit tax filing requirements in the last bullet in technical accounting thoughts, below.

The concern over having a non-profit overlap with for-profit enterprises is a valid one.

Also, running a profitable educational model as part of a farm isn't always as easy as it seems either, without a large following and/or grant or sponsorship funding. I've been the bookkeeper or assisted with the books for several regional permaculture events, PDCs, RMH events, and more. In my experience, they are very difficult to run in the black without additional support, or without already having a large, dedicated following.

On the other hand, agritourism / farm education can surely diversify income and make the operation more viable! IMHO, location and the quality/draw of your property is rather key here.

Ideas and more thoughts:

I also agree that starting small first is smart! - form a simple LLC (for profit) and try a few classes to see what turnout you have

you might consider a B Corp - https://www.bcorporation.net/en-us/

you might consider a for profit business, with a nonprofit to support the educational aspects - I think Mark Shepard, https://www.forestag.com/pages/mark-shepard, has offered classes on having interconnected businesses like this, but in general, I think that model is a nightmare for a beginner!

you might consider a cooperative or worker owned but still for profit business model

Technical accounting thoughts:

the more entities you add, the more you need accounting/bookkeeping help - including separate sets of books, separate bank accounts, etc.

LLC = Limited Liability Company and does NOT default as a corporation - this has surprised some new business owners who thought they were getting a corporation

an LLC is liability protection and stops the liability at the business in order to protect your personal assets

LLCs that are sole member file a Schedule C or Schedule F attached to the 1040 personal return

LLCs that are a partnership or corporation file a separate return - 1065 or 1120, respectively

sole member LLCs or sole proprietors are not allowed to put owners on payroll

corporations (especially s corps) *do* require payroll for owners, so if you don't/won't have payroll otherwise, this can be a burden

nonprofits file a Form 990 and must report on admin (overhead), fundraising, and program financial activity. They need to prove/maintain 80% of financial activity in programs otherwise they can lose nonprofit status. Bookkeeping and accounting plus a large portion of the director's salary (if not all of the E.D. salary) must always be 100% admin.

You might already be aware of some or even most of these aspects from your people, though I like to help clarify what kind of bookkeeping/accounting burden these things can take on.

Wishing you the best! And would love to hear how you decide to proceed.