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socrateaser
socrateaser, Attorney
Category: Business Law
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Experience:  Retired (mostly)
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I currently have controlling interest and majority ownership

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I currently have controlling interest and majority ownership of a for profit entity that markets, sells and produces (outsourced manufacturing) a dietary supplement/beverage product. I would like to set up a holding company to own my assets and consolidate my investments, including my % ownership in the for profit beverage entity. My original plan was to use personal proceeds from my for profit stock ownership to fund a non profit organization with a charitable cause that is important to me.  I have a very wealthy friend who wants to fund my collective entities/causes by making a large capital contribution (10M+). He would strongly prefer to set this up as a donation so as to receive the tax benefits, but doesn't care how much of his money is ultimately put toward just charitable causes. My question is whether or not it would be best to set up the holding company itself as a non profit and take the donation, or to set up a subsidiary (owned 100% by my holding company) as a non profit and receive the donation. Ideally I would not like all of the capital to remain in a non profit subsidiary and would rather have most of it owned by my holding company which I can then invest in other entities, including my current for profit beverage company. I would oc course use some of this capital for my charitable cause. I'm not sure if this "ideal" set up is possible unless the holding company itself is the non profit.

Submitted: 1 year ago.
Category: Business Law
Expert:  socrateaser replied 1 year ago.
A for-profit organization cannot "own" a nonprofit organization, because a nonprofit does not issue shares, or ownership interests, so there is nothing to "own."

A nonprofit is established with a board of trustees who direct the nonprofit for its charitable purpose. Trustees generally serve without compensation. Officers of the nonprofit are paid a salary, and if the organization is large and requires a highly-compensated CEO, then that individual may earn a fairly large salary -- though nothing like that of a for-profit corporation.

Assets donated to the nonprofit cannot be distributed to anyone, other than the charitable successor organization named in the articles of incorporation, in the event that the nonprofit's trustees determines that it will dissolve the nonprofit.

Failure to follow the required forms will invalidate the nonprofit's tax-exempt status and render the nonprofit liable for taxes (and penalties).

BotXXXXX XXXXXne here, it doesn't matter how you set up your organizations, because what you are attempting to accomplish is legally impossible. So, you may have to rethink your business model.

Please don't shoot the messenger.

Hope this helps.

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socrateaser, Attorney
Category: Business Law
Satisfied Customers: 33803
Experience: Retired (mostly)
socrateaser and 6 other Business Law Specialists are ready to help you
Customer: replied 1 year ago.

I understand what you are saying, and I suspected that it may not be legally possible. My goal here is to refine my method into a structure that is legally possible.


 


I would need to take the capital in the form of a donation. Regardless of this opportunity, I was planning to operate a non profit organization. Now that I have access to these capital resources, I can do so sooner than expected (I don't need to wait for personal proceeds accrued via my ownership of the for profit organization that I have majority interest in).


 


Would it be better to set up the holding company as a non profit, take the donation and function as a non profit? The purpose of the non profit would be to issue grants to young entrepreneurs.


 


As far as my understanding goes, it is possible for a non profit holding company to own (partially or wholly) a for profit entity such as my beverage company. Therefore it would seem that my non profit holding company could purchase stock in my for profit beverage company subsidiary.


 


 

Expert:  socrateaser replied 1 year ago.
Would it be better to set up the holding company as a non profit, take the donation and function as a non profit? The purpose of the non profit would be to issue grants to young entrepreneurs.

A: If you accept the donation using any organization other than a nonprofit organization set up for the charitable purpose for which the donation is intended, your organization may never obtain tax exempt status. You need to be set up as a nonprofit for the purpose related to the donation before you accept the money, or it will be taxable income.

As far as my understanding goes, it is possible for a non profit holding company to own (partially or wholly) a for profit entity such as my beverage company. Therefore it would seem that my non profit holding company could purchase stock in my for profit beverage company subsidiary.

 

This is true -- a for profit organization can be owned by a nonprofit, but any profits distributed to the nonprofit would be considered "unrelated business income," and would be subject to taxes. There is an exception where the nonprofit runs the for-profit for a charitable purpose, but it is very easy to fail in this goal and end up being taxed and penalized, so generally, it's not a great plan to have a nonprofit own a for-profit.

 

Example: nonprofit health care foundation owns shares in a for-profit pharmaceutical corporation. The profits are probably sufficiently related to the nonprofit's tax exempt purpose to avoid unrelated business income taxation. But, if the for-profit is a soft drink company that happens to make a health care related drink (e.g., "Ensure"), then that's probably insufficient to avoid the unrelated business income tax.

 

Hope this helps.

 

 

Customer: replied 1 year ago.

This is true -- a for profit organization can be owned by a nonprofit, but any profits distributed to the nonprofit would be considered "unrelated business income," and would be subject to taxes. There is an exception where the nonprofit runs the for-profit for a charitable purpose, but it is very easy to fail in this goal and end up being taxed and penalized, so generally, it's not a great plan to have a nonprofit own a for-profit.




Though I agree with you that having a non profit own some (some or all of) a for profit is generally not a great plan, it seems like the only way of essentially supplying capital indirectly from the donation to the for profit. I.e. by receiving the donation with a non profit, set up ahead of time for the same cause as the donation, and purchasing stock in the for profit... even though proceeds from the for profit will likely be taxed.


 


Alternatively, If my friend simply "donated/gave" money to a for profit organization in the form a holding company that owned my for profit beverage company and a non profit organization that I set up would he be able to receive any tax benefits? Or would this require him to donate/give money specifically to a non profit organization?

Expert:  socrateaser replied 1 year ago.
In my opinion, by holding both organizations under one roof, the IRS may deem the for-profit created for a fraudulent purpose (to provide a means of extracting profits from an otherwise nonprofit enterprise).

A donation to a for-profit organization is lawful and not taxable income, if it comes as a grant intended for a donative purpose related to the for-profit's genuine business purpose. But, you can't be both the director/trustee of the nonprofit and the director/trustee of the for-profit. The IRS will deem your controlling status as grounds to invalidate the noprofit's tax-exempt status.

You may as well just have your donor donate to the for-profit, and then proceed with a for-profit organization going forward.

Hope this helps.
Customer: replied 1 year ago.

Clarifications:

 

 

But, you can't be both the director/trustee of the nonprofit and the director/trustee of the for-profit. The IRS will deem your controlling status as grounds to invalidate the noprofit's tax-exempt status.

 

So being the director/trustee of the non profit that owns part of the for profit would be a conflict if I am also the chairman and a majority owner of the for profit (which I am), but what about the other way around? I.e. a for profit holding company owning a for profit subsidiary and a non profit subsidiary, both of which where I am the chairman and a majority owner. Would this still be a conflict?

A donation to a for-profit organization is lawful and not taxable income, if it comes as a grant intended for a donative purpose related to the for-profit's genuine business purpose.You may as well just have your donor donate to the for-profit, and then proceed with a for-profit organization going forward.

 


Given this information, I could set up a for profit holding company, receive the donation, use it to:

 

A - purchase stock in my for profit beverage company (making it a subsidiary).

 

B- set up another subsidiary that would be a non profit for my aforementioned cause of providing grants to young entrepreneurs. (contingent upon clarity from the first paragraphs)

 

 

C - use it for other investments, etc.

 

 

So even if the donor makes the donation to the for profit entity, he is still entitled to the tax advantages of doing so, no different than if he were to donate to a non profit entity?

 

Thank you very much for your time. Will tip accordingly using the provided interface.

Expert:  socrateaser replied 1 year ago.
So being the director/trustee of the non profit that owns part of the for profit would be a conflict if I am also the chairman and a majority owner of the for profit (which I am), but what about the other way around? I.e. a for profit holding company owning a for profit subsidiary and a non profit subsidiary, both of which where I am the chairman and a majority owner. Would this still be a conflict?

A: As previously mentioned, neither you, individually, nor any other for-profit enterprise, can "own" or "control" a nonprofit organization. A nonprofit does not issue shares, and has no owners, so there is nothing to own. Without an independent board of trustees/directors, a nonprofit will never achieve tax-exempt status, so it will be a for-profit enterprise.

 

Given this information, I could set up a for profit holding company, receive the donation, use it to:

A - purchase stock in my for profit beverage company (making it a subsidiary).

 

A: Yes.

B- set up another subsidiary that would be a non profit for my aforementioned cause of providing grants to young entrepreneurs. (contingent upon clarity from the first paragraphs)

 

A: No.

C - use it for other investments, etc.

 

A: If it's a nonprofit, then the investments would have no value to you personally, because you could never receive those profits. If it's a for-profit, then you can do whatever you want. But, a for-profit cannot own a nonprofit. And while a nonprofit can own a for-profit, you cannot personally gain from the profits of the organization.

So even if the donor makes the donation to the for profit entity, he is still entitled to the tax advantages of doing so, no different than if he were to donate to a non profit entity?

 

A: No. Charitable contributions are subject to specific rules dependent upon the type of recipient organization. A non-qualified organization can receive a grant tax free, but the donor cannot deduct the grant. See IRS Pub. 526.


Hope this helps.

NOTICE: My goal here is to entertain while educating the public about the law. I hope my answer is useful and informative to you. During our conversation, the website may ask you to rate my answer. If you rate my answer lower than the middle rating, then the website retains your entire payment, and I receive nothing. It is entirely your choice as to how you rate my answer. However, because your payment to me is in the nature of a donation/gift, rather than as compensation for any services rendered, you are entitled to know how your rating affects the final distribution of your donation.

If you need to contact me again, please put my user id at the beginning of your question ("To Socrateaser"), and the system will send me an alert. Please Click the following link for IMPORTANT LEGAL INFORMATION. Thanks and best wishes!

Customer: replied 1 year ago.

And while a nonprofit can own a for-profit, you cannot personally gain from the profits of the organization.




But as I understand it given your previous information, a non profit cannot own a for profit if I am the chairman/trustee of both.


 


Therefore It seems my best option, as you suggest, is to move forward strictly with a for profit organization.


 


Thanks!

Expert:  socrateaser replied 1 year ago.
That would probably be best.

Good luck!
socrateaser, Attorney
Category: Business Law
Satisfied Customers: 33803
Experience: Retired (mostly)
socrateaser and 6 other Business Law Specialists are ready to help you

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