A San Francisco group, United Libations, recently announced that it was looking to create the city’s first nonprofit bar.  It sounds like such a great idea – who wouldn’t want a portion of the price of their cocktail going to a charitable cause?  But before you rush out to form a nonprofit bar yourself, there are a few things worth considering.

First, only under rare circumstances would a bar be able to operate as a tax-exempt, charitable nonprofit.  An organization that is tax-exempt under Internal Revenue Code Section 501(c)(3) must be operated primarily for a listed exempt purpose, the most common of which are charitable, educational, and religious.  Operating a bar in and of itself would not satisfy this requirement.

It appears that United Libations addressed this problem by creating two entities: (1) a for-profit limited liability company, United Libations LLC, to manage and run the bar and the business operations and (2) a nonprofit corporation, United Libations Foundation, to handle the charitable aspects.  United Libations LLC has stated that it will donate 100 percent of its profits from the bar to United Libations Foundation, which will in turn make distributions to charitable partner projects.

Second, creating a successful for-profit bar is enough of a challenge on its own, but creating a successful nonprofit in addition to a bar greatly increases those challenges. A 501(c)(3) nonprofit must ensure that it has the ability and capacity to comply with all relevant laws, regulations, and filing requirements applicable to such organizations.  It must also ensure that it has a strong governance structure in place, as well as access to the financial and human resources that will allow it to operate as an effective and sustainable organization.  An experienced, dedicated, and educated board of directors is a key element of any such successful nonprofit.

Finally, it is worth considering whether the charitable purpose at the heart of the nonprofit bar is best served by such a dual structure.  If there is an existing organization that is effectively serving the cause or class of persons that you wish to serve, it may be possible to better advance your charitable purpose by donating profits from the bar to the existing nonprofit, which may have invested heavily in its infrastructure and expertise to maximize its impact.  Or, if your aim is to raise funds to support charitable work in general and to encourage philanthropic giving as part of everyday life, you may wish to select a few existing nonprofits to donate the bar’s profits to.  This seems to be the model of the Oregon Public House bar, which states that it donates 100 percent of its net profits to a small number of local charities that it permits each patron to select from among, as well as Cause, the Philanthropub in Washington, DC, which donates its profits to a few select charities each quarter.

If forming your own nonprofit still seems like the way to go, you should think about where the funding is going to come from.  If the profits from the bar will be the nonprofit’s only funding source, it may fail the mathematical public support tests that would make it a public charity and instead be classified as a private foundation, subject to additional regulations and requirements.

Moreover, if the nonprofit wishes to make grants to other organizations, its leaders should consider whether they have the appropriate level of knowledge and expertise to be effective grantmakers.  If making grants to non-501(c)(3) or foreign organizations, the nonprofit may be required (or choose as a best practice) to exercise expenditure responsibility.  At a very minimum, the nonprofit will need to exercise due diligence in selecting the organizations it gives to and ensuring that the funds are used for a charitable purpose consistent with the nonprofit’s own exempt purpose.  If your plan is for the for-profit bar to financially support foreign nonprofits, one advantage to forming an affiliated 501(c)(3) nonprofit is that the bar’s donations to that organization may be tax-deductible, whereas its direct contributions to foreign nonprofits will not be.  However, it is again worth considering whether your charitable purposes may possibly be better served by giving to an existing domestic 501(c)(3) nonprofit providing grants to foreign organizations.

These considerations aside, I’m excited about this new model for charitable giving and am looking forward to raising a toast for a good cause at some point soon!