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Just because you run a not-for-profit organization doesn\u2019t mean you can function on low or no income. Although your nonprofit\u2019s tax-exempt status prohibits certain money-making activities, you may be able to create a for-profit subsidiary that isn\u2019t hampered by such restrictions. In addition to producing income, a subsidiary can help you reduce taxable unrelated business income and limit legal\u00a0liability.<\/p>\n
Surplus support<\/strong><\/p>\n Nonprofits must have a legitimate reason for forming a for-profit subsidiary. Fortunately, \u201clegitimate\u201d is broadly defined. You may create a for-profit subsidiary to generate revenue to\u00a0support your nonprofit \u2014 whether surpluses are used for budget shortfalls, emergencies or new programs. For example, your historical museum may open an adjacent restaurant. After taxes and operating expenses, you may use surpluses from the restaurant for your nonprofit.<\/p>\n You just have to be careful not to distribute any of a subsidiary\u2019s profit to board members or employees. That\u2019s private inurement, and it\u2019s\u00a0illegal.<\/p>\n UBIT issues<\/strong><\/p>\n Forming a for-profit subsidiary can also be a good idea if your nonprofit is subject to unrelated business income tax (UBIT). This is particularly important if you\u2019re at risk of losing your exempt status because the IRS considers your gross revenue, net income or staff time devoted to unrelated business activities as too \u201csubstantial.\u201d<\/p>\n Many nonprofits with income-generating real estate holdings form subsidiaries for this reason. If, for instance, a donor has given you a piece of commercial real estate and you want to develop the property and rent it to retail businesses, a separate for-profit entity is recommended. You\u2019ll owe corporate taxes on the subsidiary\u2019s net income, but you can use the after-tax profits for your nonprofit\u2019s activities without fear of losing your exempt status or\u00a0owing\u00a0UBIT.<\/p>\n Legal concerns<\/strong><\/p>\n You also may be motivated by legal concerns. If your nonprofit owns significant assets or offers services unrelated to your mission, a separate entity can insulate you from liability risks. This includes lawsuits alleging negligence and accidental injury that could prove financially devastating.<\/p>\n And if you run unique programs or initiatives with different management and staff requirements, a subsidiary can help prevent these sideline activities from overwhelming your nonprofit work. Finally, a for-profit subsidiary may provide your organization with funding opportunities that were previously inaccessible. For example, a subsidiary is generally in a better position to obtain bank loans and private investor money than a\u00a0nonprofit.<\/p>\n Better alternatives?<\/strong><\/p>\n If a subsidiary sounds like a good idea, be sure to take it up with your board. Board members must support the introduction of any subsidiary \u2014 and they may have valid objections that you haven\u2019t considered. Also talk to financial and legal advisors who can help you decide if a subsidiary is the best option for boosting income, or whether better alternatives\u00a0exist.<\/p>\n \u00a9 2023<\/em><\/p>\n <\/body> Just because you run a not-for-profit organization doesn\u2019t mean you can function on low or no income. Although your nonprofit\u2019s tax-exempt status prohibits certain money-making activities, you may be able to create a for-profit subsidiary that isn\u2019t hampered by such restrictions. In addition to producing income, a subsidiary can help you reduce taxable unrelated business […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,10,15],"tags":[8,11,12],"class_list":["post-16738","post","type-post","status-publish","format-standard","hentry","category-articles","category-news","category-not-for-profit","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16738","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=16738"}],"version-history":[{"count":1,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16738\/revisions"}],"predecessor-version":[{"id":16739,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16738\/revisions\/16739"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=16738"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=16738"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=16738"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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