Yes, a nonprofit organization may create a subsidiary with either a for-profit or a nonprofit structure. In some situations creating a subsidiary may make sense. If you think this is something your organization should do, please talk to an attorney familiar with both corporate and nonprofit law to fully understand the tax and legal implications.
For-profit subsidiaries of nonprofits
A nonprofit parent may establish a for-profit subsidiary because, for one example, its leaders wish to engage in unrelated business activities that don't directly pertain to the stated mission of the nonprofit. Otherwise, the nonprofit may be required to pay an Unrelated Business Income Tax, commonly referred to as UBIT. A nonprofit may also create a for-profit subsidiary in order to avoid possible risk and liability that might be directed at the original organization if the activities were carried out under its tax-exempt status.
Nonprofit subsidiaries of nonprofits
In the case of nonprofit subsidiaries, these may be established in order to carry out activities that are significantly different from the original mission of the parent corporation.
When a for-profit organization chooses to create a nonprofit entity, the typical outcome is the creation of a corporate foundation, which is a totally separate, independent entity but which receives its principal endowment from the parent company. Corporate foundations typically award grants for charitable purposes to tax-exempt organizations and causes that the company supports. Learn more about corporate foundations»
A for-profit corporation is less likely to create a nonprofit subsidiary that is not wholly independent from the parent. Because 501(c)(3) tax exempt charities exist to benefit the greater public good, must be headed by an independent board of directors, and generally draw the bulk of their support from public sources, legal conflicts of interest may arise in having an association with a for-profit parent. In order to stay on the straight and narrow with the IRS, an attorney familiar with both corporate and nonprofit law would have to be involved.
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