How to Do Business Between Your Nonprofit and For-Profit Entities
In this episode of Coffee with Carl, attorney Carl Zoellner guides you through the process of doing business between your nonprofit and for-profit business entities.
Hello everyone, and welcome to another episode of Coffee with Carl.
Today I want to talk a little bit about owning a nonprofit, and can you do business between your nonprofit and your for-profit entities?
This is one of those questions that comes up quite a bit, especially when folks start up a nonprofit. I will give you the simple answer to a complex issue because each state can have different requirements, especially when talking about loans and things like that.
Working with a nonprofit and your for-profit side of your business certainly can be something that needs extra attention. You will want to make sure you are consulting with a really good non-profit attorney at Anderson Advisors. We have a dedicated attorney that just does non-profits because there are lots of little niches you need to be aware of when working with those two types of businesses.
Back to the original question here, can you do business? Yes, you can. One of the main pieces you will need to understand and respect is it needs to be an arm’s length transaction. Those two businesses need to be treated completely separately.
Your nonprofits will not give your for-profit brother-in-law a type deal just because you’re on the board of the nonprofit. It needs to be reasonable, commercially reasonable, which is quite frankly, just a good suggestion when you’re working between entities in your entity structure.
One of the key things you look at, especially if you’re in front of a judge and there’s an argument that the veil should be pierced, is, was it commercially reasonable?
Did I give a $150,000 or $250,000 loan that can be repaid in 20 years but charge 25% interest? In the market, that usually wouldn’t be very reasonable for that percentage of interest return. So you would look at what are common things, or common amounts or good deals that are out there right now.
Certainly, with interest rates being low, you can use the low-interest rates if you’re going to do some sort of loan. However, commercially reasonable is always a great place to be when working between businesses becomes all that much more important when you have a nonprofit with that exemption from paying the income tax or paying income tax for the nonprofit’s charitable purpose.
If you’re generating income for that charitable purpose, it comes with some strings attached. It’s supposed to be for the public benefit. So everything needs to be on the up and up.
It’s sort of a simple answer to a complex question when nonprofits and for-profits work together, especially if there is a board member involved from the nonprofit. The nonprofit does not have shareholders; it has board members and usually officers within it.
You want to make sure you’re doing things in a way that if you had outside scrutiny, they would say, “You know what? Yep, that was a normal deal that you would see any business give any other business.”
So that’s about how to work a non-profit with a for-profit. The devil is in the details. And I would suggest talking with an attorney familiar with nonprofits to make sure that you’re doing things correctly. You don’t want to violate the nonprofit’s purpose and run into UBIT issues on the tax side for doing some sort of unrelated business.
The Takeaway
As always, keep taking advantage of our FREE educational opportunities and the FREE content we put out on the web. So that’s Toby’s Tax Tuesday, our tax and AP events for our clients who’ve already gone through our Tax and Asset Protection event.
Our Structure Implementation Series is fantastic. That answers a lot of the questions you have in the beginning. So there are a lot of different educational opportunities out there. One of my favorites as well is our Infinity Investing Workshop.
Resources mentioned in this video:
- Join our next Tax & Asset Protection event to learn more advanced tax minimization & entity structuring strategies
- Subscribe to our YouTube channel to make sure you never miss the latest strategies & updates
- Check Out Toby’s Video where he mentions PLLC on your business card
Got an idea for a future Coffee with Carl? Send it to Carl at cwc@andersonadvisors.com.
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