Topics Business

Question I own a for-profit that provides a service. Unfortunately, due to financial constraints, I cannot provide this service charitably. Would it be unethical to create a 501c3 (non-profit foundation) arm to provide my service to underprivileged folks and hire my for-profit arm to conduct the event? Please note that, objectively, my for-profit arm is truly the most capable provider of this service in the area; also, the purpose of many foundations is precisely to hire vendors, not to direct events themselves. Thanks for your insights.

Accepted:
April 20, 2011

Comments

The answer depends, I would think, on how much money your for-profit company would charge for the service. I don't know the details of your operation, of course, but suppose you have a few employees performing the service and suppose you break even if you charge your customers $17 per hour of any of your employees' time. In fact, let's say, you charge more like $26 per hour, so your company makes $9 per hour, or whatever is left of that after taxes. As the owner of the company, you reinvest some of this money and draw out the rest for your consumption and personal savings.

Now in order to be quite sure that you are acting ethically, you could have your for-profit arm charge the non-profit arm a price that does not increase your company's net profit. By using the word "unfortunately", you suggest that you would very much want underprivileged folks to have access to your service but simply cannot provide it charitably. But you can certainly afford to provide it without a mark-up. The less you charge for your service, the more of it you can provide to the underprivileged with the funds you raise for your non-profit. So why not charge (in my example) $17 per hour, or even a bit less on the assumption that, with more business, your overhead per hour declines?

I think you could ethically make a small profit for your for-profit arm. But as you go substantially above $17 per hour, you are increasingly disregarding the interests of the underprivileged, increasingly prioritizing your own financial gain, and increasingly positioning yourself at odds with the donors to your non-profit (who are donating, presumably, because they care about the underprivileged and not because they want to increase your firm's earnings). I don't think there is a sharp line here (though I assume the law draws one somewhere as a constraint on 501c3 status). But it's very clear that you would not be acting ethically if you charged your non-profit a higher price for your service than you are charging more well-heeled customers.

Things become less neat when you provide the service yourself. In this case, there is no salient break-even point. In this case, you should charge your reservation price or a little less. The reservation price is the lowest amount you would accept for your time from an ordinary customer on the assumption that no one else would ever know of the transaction (so it wouldn't affect what others are willing to pay). If, under this condition, you would serve an ordinary customer for $20 an hour, then you should charge your non-profit arm about this much -- or perhaps a little less so that, alongside the donors to your non-profit, you also make a bit of a sacrifice for the underprivileged.

Just to be very clear, none of the above is meant to address the legal requirements applicable to 501c3 non-profit organizations.