Can 501(c)(3) nonprofits sell goods and services like a for-profit?

Question

United States/NY state here.

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.

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.?

If nonprofits are not allowed to sell goods and services, where is this documented and what are some legal gymnastics I could finagle to get my desired outcome?

And if they are allowed to sell goods and services, what constraints, regulations, restrictions, etc. apply?

Answer 1

Are 501(c)(3) nonprofits allowed to sell goods and services to the public (like any other for-profit would)?

Yes. The sale of goods and services as you describe it does not sound in violation of 26 USC § 503.

However, the 501(c)(3) tax-exempt entity would need to pay tax on income earned from those sales. Per U.S. v. American College of Physicians, 475 U.S. 834 (1986), using that income to advance the purposes for which the entity was created does not necessarily qualify the activity or sales as "substantially related" to entity's said purposes. An exemption thereto "depends in each case upon the facts and circumstances involved", Id. at 843 (citing Treasury regulations, emphasis added in the court opinion).

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 substantially related to the performance of charitable purposes of your organization.

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.?

No. In fact, doing it for purposes of being exempted from income tax on those sales would be tantamount to "to carry[ing] on full-fledged commercial enterprises in competition with corporations whose profits were fully taxable", Id. at 838, which is what prompted "Congress to restrain the unfair competition fostered by [former] tax laws" (brackets added).