Nonprofit Bike Shop: Can I Do That?

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Yesterday, reported that Marcus Fetch, a former nomadic traveler was opening Redemptive Cycles, a nonprofit bike shop.  The article explains, "The [shop's] nonprofit status allows the business to serve a charitable function, rebuilding, fixing and reselling used bikes at the cheapest price possible." 

How is it possible that a retail store, which provides goods and services in the selling and repair of bicycles, can be a nonprofit organization?  It seems so… commercial. 

There are a couple of key underlying legal principles that have made Mr. Fetch's vision a reality.  If properly understood and applied, these same principles can undergird other similarly inspired founders of innovative charitable organizations.

1.         A Qualified Exempt Purpose.  According to the Internal Revenue Code ("IRC") exempt organizations must operate exclusively for one of several qualified purposes.  Though we have not seen Redemptive Cycle's articles of incorporation, it is likely that the organization's purpose was charitable, such as to promote reduced use of gasoline and healthful exercise.  As Mr. Fetch stated, " "Birmingham just kind of stuck with me. I liked it here. I belonged here. I recognized that need, people who needed bikes and no solution for it like I've seen in other cities. I was like, 'I'm going to give this a shot."  Such vision and its execution could qualify as a charitable purpose.  In addition to such charitable purposes, the IRC allows for a variety of other exempt purposes, including those that are religious and educational. 

2.         No Impermissible Benefit.  Redemptive Cycles, like other exempt organizations must state in its organizational documents that no net earnings of the organization shall inure to the benefit of, or be distributable to its members, directors, officers, or other private persons.  It must also operate consistently with that statement.  This is not to say people cannot benefit from the operations of the shop; indeed that is the reason for existence.  But the shop's operations must benefit the public, and recipients of the shop's benefits must be within a charitable class. Regarding compensation, Mr. Fetch may draw a salary for his work with the shop, but it must be reasonable, in return for commensurate value, and in furtherance of the shop's exempt purposes.

As long as Redemptive Cycles, or any other organization seeking exempt status, is careful to be organized and operated within the regulations specified in the Section 501(c)(3), such an organization is free to help people and improve the world, free from the encumbrance of income taxation, and potentially with the charitable contributions of supportive donors.  Visionaries like Fetch should be encouraged to pursue their dreams, but take care to speak with a qualified legal professional to ensure the organization is properly formed and receives the maximum benefit available to it under the law.