While it’s not uncommon for large companies to engage in charitable activities, creating a business structure with both nonprofit and for-profit components can be very tricky. It’s a good idea to check with an attorney familiar with corporate and nonprofit law before expanding your business into the nonprofit sector—especially since doing so many open your business up to more scrutiny from the IRS. But, in general, here are some points to consider:
Why create a nonprofit subsidiary?
A nonprofit is an organization established to serve the public good or the shared interests of a particular group. Organizations like charities, schools, labor unions and religious institutions can often qualify for 501(c)(3) status from the Internal Revenue Service (IRS), which means they may receive certain tax exemptions. A for-profit company may also create a nonprofit entity to serve as a charitable foundation to distribute grants to other tax-exempt, mission-driven organizations. (Read more about nonprofits via The Nonprofit Guide from Northwest.)
According to the IRS , it’s becoming more common for nonprofit companies to create a for-profit component. This can also be tricky to set-up without threatening the parent organization’s non-profit status. But, the IRS has a helpful primer on how to do this within the law.
Would a nonprofit subsidiary change my tax status?
No. If a for-profit company creates a nonprofit subsidiary, that new business would need to operate on its own, with an independent board of directors and separate accounting systems.
How can a company start a nonprofit subsidiary?
To start a nonprofit company, you would need to get approval from your company’s board of directors or its members, then file the necessary paperwork with the state (i.e. Articles of Incorporation). Once your paperwork is filed, you would then need to obtain an EIN from the IRS and apply for 501(c)(3) tax-exempt status.