There are many mechanisms for a for-profit to participate in the nonprofit world through donations of resources, talent or operating funds. However, sometimes a company's for-profit work touches the nonprofit community and presents a better opportunity for the company to better engage the community with a nonprofit mission. In these cases, forming a nonprofit corporation under an incorporated for-profit company provides the greatest benefits to all involved. The steps for incorporating a subsidiary nonprofit are relatively simple, but ensuring that the proper separation is kept between the two resulting companies can be complicated.
Do the Research
The first step in forming a nonprofit corporation under a for-profit is to ensure it is the best direction for the company. Creating a nonprofit that is tied to the for-profit company means the nonprofit must be propped up by the for-profit. It can complicate a board of director's fiduciary responsibilities. For that reason, many companies choose to endow a completely separate foundation and let it run on its own. Alternatively, some states offer Low-Profit Limited Liability Company (L3C) status for socially-interested for-profit companies that need to fundraise like nonprofits.
Establish a Subsidiary
A subsidiary company is one that is owned by a company rather than a person or a group of people. Incorporate a new subsidiary of the for-profit company as a nonprofit, listing the for-profit as the company owner. This must be done both at the state and federal levels. At the state level, nonprofit corporations go through the attorney general's office and usually receive their status immediately. At the federal level, an application for tax exempt status must be filed with the Internal Revenue Service. This may take from 90 days to one year to receive approval.
Appoint a Board
When a nonprofit is owned by the for-profit corporation, IRS rules require that the board of directors have a completely different makeup. Benefits that corporate board members receive for their duties, such as salaries and health insurance, are banned for nonprofit boards of directors. The new board and the executive director cannot be answerable to the for-profit board of directors. The subsidiary must make its own decisions and execute its mission independently. The appearance of interference may not only jeopardize the nonprofit's tax exempt status, but it may also alienate potential donors.
Read More: How to Sue a Nonprofit's Board of Directors
Separate General Ledgers
The income of the nonprofit must be separated from the income of the for-profit company. Any donations or operational assistance, such as consulting, must be accounted for as if it were between two totally separate companies. Open new vendor accounts to service the new nonprofit, even if the vendors have a long history of dealing with the for-profit arm. Both the parent for-profit and the subsidiary nonprofit should have separate aging reports and purchase order policies.
Tony Russo has been a general assignment reporter and an editor for weekly and daily community newspapers since 2004. He is a business blogger for several regional websites and produces a weekly news and entertainment podcast.