Tara,
If I'm understanding your post correctly, you are saying that someone has advised you that you must set up a separate corporation in order to provide services that otherwise might be considered as being in the for-profit realm. Specifically, cleaning and other services associated with rental of your ballroom at a historic house museum. In other words, you've been advised that you might be stepping into a realm that would potentially create some Unrelated Business Income Tax (UBIT) consequences for your (presumably 501(c)3 nonprofit) organization. However I also believe the advice is either incorrect, or has not been properly communicated in this instance.
Before you seek out advice on setting up a separate for-profit entity, I urge you to understand the tax issues surrounding your museum's getting into the facility rental/rental venue business in the first place. Depending on how your organization approaches this, you may or may not have any income tax consequences. But even if you do end up paying income taxes on some or all of the related income, it's not necessary to set up a separate corporation. You just need an accountant who is familiar with the relevant tax issues. Ultimately you have to be good at booking income and expenses, and knowing which ones have tax consequences and which ones do not. You would only pay income taxes on that portion of the income that falls into the "unrelated" realm, assuming you go down this path. But there are other alternatives as well.
One thing I recommend is that your organization consider keeping the activity mission-focused from the outset. You are a historic house museum, and you are engaged in the business of preserving that house and interpreting its history and significance to the public. You are not a private events planning firm--there are for-profit corporations and individuals who do that sort of thing (and in the process, this is where "unrelated" starts to come into the picture, because your organization would be stepping into activities that compete with those for-profit businesses). However, if your organization only rents out facilities such as your ballroom (according to a set of policies and procedures that you've developed), and particularly if you provide guests of the renter the opportunity to engage with your house's history via docents and maybe even tour the rest of the house as appropriate during the private rental event, you can avoid a whole lot of other issues. (You can also defensibly count the guests as visitors in this kind of arrangement, which may be important if your overall site visitation is low.) Develop a preferred list of for-profit businesses who you refer renters to for catering, the tables and chair rentals, etc., and you can also forge better community connections and potential fund development prospects in the process.
Renting out museum facilities will also demand staff time. Potential renters will have many questions, and they'll need to be able to receive prompt responses. You'll need to consider how you'll handle liability issues, and how to tactfully manage events that involve folks who may not be in "museum respect" mode. Getting into any new business line means that someone will need to understand and manage the associated workload. Rental venues often flourish because of their reputation, but this is a double-edged sword. Good luck as you consider this new opportunity. I personally have found it to be not only a good income-producer for the museums that I have worked at and managed, but also a fantastic way of bringing in a wide variety of guests (sometimes quite well-to-do and politically connected) who might otherwise never have visited my museum.
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Paul Hammond
Executive Director
March Field Air Museum
Riverside, California
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Original Message:
Sent: 05-19-2017 12:00 PM
From: Tara Hitzig
Subject: Museum Facility Rental question
Hi, we are looking forward to adding income by renting out our ballroom. We have been advised that we need to set up a separate corporation to provide services such as clean up and lights. Does anyone have a draft or form of agreement between the nonprofit and the for profit entity for supplying these services?
Tara L. Hitzig
Executive Director
The Automobile Driving Museum
www.theadm.org
Direct Line: 310-658-5564
Museum Hours:
Tues-Sun 10AM-4PM
