Basic Training: X is for X-acting Tax Rules for NFPs

Nina L. Kaufman, Esq.

Nina L. Kaufman, Esq.

Nina L. Kaufman, Esq., owner of Ask The Business Lawyer, is an award-winning business attorney, speaker, and Entrepreneur Magazine online contributor. She saves consulting and professional services companies time, money, and aggravation by serving as their outsourced legal counsel.

Posted on July 10, 2015 in Money & Finance

Post image for Basic Training: X is for X-acting Tax Rules for NFPs

Entrepreneurs occasionally ask me about the value of forming a nonprofit (“not-for-profit corporation” (NFP) in legalese). I suppose they say, “Hmmm . . . nonprofit . . . that means I don’t have to pay taxes!”

And to a certain extent, they’re right. Nonprofits are exempt from paying federal and state income taxes, provided you have organized them properly. They’re not a way for individuals to get rich (let’s leave aside the United Way scandals and the like). Other than a reasonable salary that staff can earn, all of the profits need to go toward the project, community or purpose of the NFP. But people still come up with clever approaches, to see if there’s a loophole in there, somewhere.

Q.: Can a nonprofit use any of its proceeds to help fund or start up a new venture in an LLC?

A.: Generally, nonprofits do not use their proceeds to fund for-profit ventures, for two important reasons. First, the profits or funds generated by a nonprofit need to be put toward the people or programs the nonprofit was set up to help. If it starts a for-profit LLC, the profits would need to be channeled back to the nonprofit organization. Second, there are complicated tax rules concerning certain kinds of not-for-profit structures. If too much of the funds generated for the nonprofit come from for-profit sources (like business ventures or selling products), it can harm the organization’s ability to keep its nonprofit tax status. I’d highly recommend that you speak to an accountant familiar with the tax rules for not-for-profits so that you can get a handle on the scope of what will be acceptable . . . and decide whether that fits within your goals.

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