For-profit organizations operate with the primary goal of maximizing income and profitability for their owners or shareholders. As opposed to for-profit organizations, nonprofit organizations (NPO) are legal entities organized and operated primarily to fulfill a specific mission or a collective, public, or social benefit. Any surplus revenues from NPOs gets reinvested into their programs and services rather than distributed to owners or shareholders.
Tax Status
Typically, 501(c)(3) of the Internal Revenue Code exempts NPOs from federal income tax on donations and other mission-related income. In other words, NPOs are generally able to provide their services as a public good without rendering a portion of their earnings back to the government. In contrast, for-profits cannot benefit from tax exemptions and are subject to federal, state, and local taxes on their income.
Can a Nonprofit Organization Own a For-Profit Organization?
While NPOs and for-profits have different motives, exist for different purposes, as well as have different tax statuses and overall levels of flexibility, an NPO can legally own a for-profit business. This is typically done by forming a for-profit subsidiary, such as a C corporation. Having an NPO own a for-profit business can be strategically beneficial under certain circumstances. This ownership is often established to generate additional revenue to support the NPO’s charitable mission or leverage the for-profit’s resources. Both the NPO and the for-profit must consider and prove strict adherence to applicable legal and regulatory frameworks.
The NPO must ensure that the for-profit subsidiary does not jeopardize its tax-exempt status under federal tax law. While an NPO can engage in some profit-generating activities, these should align with the NPO’s mission and not overshadow its NPO purpose. Income from unrelated business activities may be subject to unrelated business income tax (UBIT). To maintain clarity and protect the NPO’s tax-exempt status, the NPO and the for-profit must operate as separate legal entities.
The for-profit subsidiary must operate independently, maintaining separate boards and meetings, to ensure compliance with tax regulations. Financial transactions between the NPO and the for-profit should be conducted at arm’s length to avoid conflicts of interest and ensure transparency. In other words, the transactions should be made as if the entities were unrelated, ensuring market rates and terms.
By owning a for-profit, an NPO can expand its mission-driven activities into commercial ventures that align with its goals. The for-profit may provide the NPO with the financial stability and resources it may require for expansion, including expertise and technology.
