A common question among entrepreneurs is whether it is possible to operate a for-profit business with one or more non-profit arms. While such business plans may be the product of good intentions, there are a couple legal concepts to keep in mind as potential drawbacks of such a business structure: private inurement and private benefit.

Private Inurement refers to circumstances in which the earnings, assets, or resources of a non-profit organization benefit, or are used for the personal gain of, individuals or entities that have a close relationship with the organization such as its founders, board members, officers, or employees (typically called “insiders”). Issues arise when these assets or resources are transferred to or used by insiders for purposes unrelated to the non-profit’s stated tax-exempt purpose.

Private Benefit, a much broader rule, prohibits tax-exempt organizations from using assets to benefit the interest of any private individual, business, or non-charitable entity. However, this does not include benefits only incidental to the organization’s stated 501(c)(3) purposes.

If a non-profit is structured as a charitable arm of an existing for-profit business, the IRS may view the non-profit as having been formed for the purpose of using the benefits of tax-exempt status to subsidize the for-profit business. This scrutiny can make it more difficult to obtain 501(c)(3) status, as one of the requirements for a tax-exempt organization is that it operate exclusively for 501(c)(3) purposes. 501(c)(3) status may even be revoked as a result.

The bottom line: while it is often great to pursue multiple business ventures, entrepreneurs and business owners should proceed with caution when operating closely related non-profit and for-profit businesses. It is best to keep a non-profit organization and for-profit organization as separate and distinct from one another as possible to avoid potential private inurement and private benefit issues.

For assistance with your non-profit’s formation and tax exempt status, contact the clinic at businessclinic@elon.edu.

 

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