Social enterprise burger joint

If you're bothered by the Burger King that questions global warming, here's news of different kind of hamburger joint: Burger City, a Tucson nonprofit gourmet restaurant whose profits help fund the 501(c)(3) ArtFare.

From one perspective, Burger City is a stellar example of social enterprise, particularly in the way the business model is shifting from dedicating all of the profits to charity to more of a hybrid structure. However, as folks familiar with U.S. nonprofit law no doubt realize, a charity that uses a restaurant to generate revenue raises interesting tax questions.

Having to pay unrelated business income tax is one possible consequence, inasmuch as operating an ongoing burger joint is arguably not related to ArtFare's exempt purposes--using the profits the fund the charity is not enough to count as relatedness. Ways a social enterprise restaurant such as ArtFare could possibly avoid UBIT include staffing the restaurant with volunteers, employing people in need as part of a charitable program or arguing that the restaurant is part of an economic development program in a needy part of town.

Beyond UBIT, socially entrepreneurial charities also need to take care lest the venture provide a basis for the IRS to revoke their tax-exempt status. With Burger City planning to expand as a franchise, this is a particularly salient concern. As this case involving a charitable vegetarian restaurant illustrates, the IRS and the courts might conclude that a social business is practically indistinct from a commercial business and thus not qualified for tax exemption as a 501(c) organization.

A relatively safe and standard strategy for dealing with UBIT and exemption concerns has been to spin off the charitable enterprise as a separate entity, an approach that also has the benefit of shielding the parent charity from liability resulting from the business. That said, with so many charities now embarking on entrepreneurial business ventures, there's good reason to be nostalgic for the days when all profits earned were tax-exempt so long as they were used for a charitable purpose.