I run a 501(c)(3) nonprofit organization that has a mission to restore the community environment. Increasingly there are for-profit companies doing a substandard job of what we provide for free as a nonprofit. I would like to start a for-profit arm that would allow us to go after the business that is solicited by the city where I live. Would this be okay?
If you are doing the same work as for-profits do now as a substantial part of your activities, I assume that you have made a decision that it is within your charitable mission to do it. If so, there is no rule that says you can’t be paid to perform services that are part of your mission. Hospitals and colleges charge their patients and students every day. Orchestras and theater groups charge those who watch their performances. You could charge for the work just as the for-profits do and increase your revenue to allow you to do more. Your customers might even think it is more valuable than your current free service and you wouldn’t have to pay unrelated business income tax (“UBIT”) on the profit because the service wouldn’t generate unrelated business income. (See Ready Reference Page: “Nonprofits Often Worry About UBIT”)
(If you are working in Pennsylvania, the state has what I think is a unique law that allows a “small business” to enjoin competition from a charitable organization. (See Ready Reference Page: “Act 55 Defines ‘Charity’ Eligible for Exemption”) But the challenge is applicable only to “unrelated” business activity and we are assuming that this work isn’t unrelated.)
Your question asks about competing for “business that is solicited by the city” in which you live. If you are talking about business solicited by the municipality itself, it seems unlikely that the city would rule out a nonprofit competitor. But if it does and you have time to serve the city’s needs as well as your other customers, you could form a for-profit organization to pursue that work alone. You would just have to pay regular business taxes on the profits, which you would avoid if you do the same kind of work through your nonprofit.