Can a non-profit organization have a subsidiary for profit business if it is to support the non-profit organization?

Asked almost 4 years ago - Saint Petersburg, FL

I started a non-profit organization to help orphaned children in Haiti. It has been hard to have a constant operating budget and obtain donations. I have came up with an idea to start a catering company in which the profits would support the non-profit organization. Is this allowed? If it is, what do I have to do?

Attorney answers (2)

  1. Bryant Keith Martin

    Contributor Level 18

    Answered . Notwithstanding my colleague's answer: Yes, your plan is allowed and you may have the 501(c)(3) nonprofit run the business.
    A nonprofit exempt organization (an EO) can engage in an unrelated business for profit. Its gross income less the deductions directly connected with such trade or business is called its “unrelated business taxable income” (UBTI) and is taxed at corporate tax rates unless the EO is a trust. Note that an EO can operate a related business tax-free. Examples are an art-book store in a museum and even a snack bar located on the premises for the convenience of the patrons. It is not likely that sales by your catering company could be tax free to the EO since it does not seem to be related to the exempt purposes of your EO. That does not mean you can't do it, just that the EO must pay tax on its income. Operation of a travel agency to assist in travel to and from Haiti could conceivably be found to be so related and hence could be operated profitably taxfree by your EO. The regulations on UBTI are extensive and I recommend that you consult a knowledgeable attorney specializing in EO’s.

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    (Bryant) Keith Martin
    sbbizlaw.com

  2. Haig Panossian

    Contributor Level 8

    Answered . Before addressing the legality of your issue, I want to let you know that you are asking two different questions. In response to your first question, a tax-exempt 501(c)(3) corporation, such as a nonprofit, cannot operate a for-profit subsidiary or else it would lose its tax-exempt status according to the IRS Code and regulations. (Note that the IRS' grant of a tax exemption to charitable corporations requires that such corporations be operated mainly for their stated charitable purposes. In this case, operating a for-profit catering subsidiary is clearly wholly separate from your non-profit's mission to aid orphaned children in Haiti. As such, your nonprofit could wind up losing its tax-exempt status.

    However, in your second question, you never mention creation of a subsidiary by your nonprofit. Your second question merely implies that you yourself will create a profitable catering business and use any profits to help support your nonprofit. Based on only the bare facts you have provided, there is nothing illegal about that because you would be acting in your individual capacity, not the nonprofit, to operate a profitable catering service. You should, however, be careful to avoid any fiduciary duty issues in using one of your businesses to finance another.

    I hope my response was helpful.

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