Let’s suppose that Bart’s Bartending School is organized as a chartered, not-for-profit educational corporation.
How would Bart set things up so that he can make money on the deal? I believe that Bart has a for-profit “operating corporation” that makes the money, but . . . what is the relationship (in general) between such a “for-profit” and “not-for-profit”?
Bart could make money by hiring himself as president or somesuch and pay himself an exorbitant salary. I’ve worked for a few non-profits (publishers and associations) and somehow the top dogs make boobles. At the one association I know the CEO made more the 3/4 of a million AND had perks like $1000 per month in car allowance. All for a non-profit.
Non-profits can’t have ownership and dividends and such. But there are many MANY that do make a profit, even if they see a need not to show one.
Ok, but how can one use an affiliated for-profit corp. to get money out? And if the non-profit doesn’t have ownership, then who controls it and how?
I do not think a for-profit corp. can affiliate with a charitable organisation.
That’s not correct. A not-for-profit can have a for-profit subsidiary. I don’t know the structure needed for it, but our not-for-profit hospital has whole or part ownership in several commercial enterprizes, for instance a uniform cleaning service.
This is a matter of state law, and I have no idea if this would work in your state.
With that in mind, here is what I have seen:
Company A is organized as a for-profit corporation. Same incorporators incorporate non profit “B” (and “C” and “D”, etc). B engages in the things that only non-profits are allowed to do under that state’s laws (i.e. receive federal/state funding, run “las vegas nights”, etc.) B would normally enter into real property leases, equipment leases, hire staff, and etc.
However, Company A offers to do all of this for company B, under a management agreement. The terms of the management agreement are that Company A assumes all debt, does all hiring and firing, provides all equipment and supplies, and etc.
In return, Company B pays to Company A 95% of its gross income.
Voila, the profits are sucked out of the non-profit.
This is a matter of state law, and I have no idea if this would work in your state.
With that in mind, here is what I have seen:
Company A is organized as a for-profit corporation. Same incorporators incorporate non profit “B” (and “C” and “D”, etc). B engages in the things that only non-profits are allowed to do under that state’s laws (i.e. receive federal/state funding, run “las vegas nights”, etc.) B would normally enter into real property leases, equipment leases, hire staff, and etc.
However, Company A offers to do all of this for company B, under a management agreement. The terms of the management agreement are that Company A assumes all debt, does all hiring and firing, provides all equipment and supplies, and etc.
In return, Company B pays to Company A 95% of its gross income.
Voila, the profits are sucked out of the non-profit.
Oops - sorry about the double post. Thought the last one timed out.
Thanks a lot Houlihan that was very helpful.
consulting fees 
As others have indicated, a not-for-profit corporation can purchase services (such as management or consulting services) from for-profit entities and can hire and compensate employees.
A NFP corporation is required to pursue the purposes (such as education, charity, civic improvement) it selected when it was formed; the state would not have granted it a NFP corporate charter if the purposes were not proper NFP purposes. The NFP may also have a tax-exemption (granted by the IRS). An NFP which ceases to pursue its purposes can be dissolved by the Secretary of State, who can also pursue any funds not properly spent in pursuit of such purposes. The IRS can revoke the NFP’s tax-exempt status and impose taxes and penalties if the NFP’s funds “inure” to the benefit of any person or for-profit entity. (“Inurement” means a mis-spending of funds; it does not mean the NFP cannot purchase goods and services and pay employees.)
NFPs get in trouble if they overpay for goods, services or employees. If the IRS investigates, it will look to see what the going market rates for such goods, services and employee services are and the NFP will be in trouble if it could have done better. That is why NFPs will typically get multiple bids for projects and will get appraisals before selling property.
If you think that someone is abusing NFP funds, you may want to ask for evidence (a copy of a board resolution) showing that the NFP board knows about and has approved the activity in question; or, you can complain to the Secretary of State of the state where the NFP is formed. You can find out a lot of information about tax-exempt NFPs (including, amazingly, the salaries of their top officers) from the Form 990s they must file.
Thanks a million, Humble Servant, that explanation (and that link) was very helpful. Since you’re such a smarty-pants, maybe you could help me with a follow-up question - could you be a little more specific about what “management . . . services” might consist of?
(Of course, anyone else is free to share his or her thoughts.)
Damn near anything a manager might do a consultant can do better…right :rolleyes:
Background checks on employees
Financial planning/budgeting analysis
Business efficency improvements
Target marketing
Fundraising program training
By the way, do you happen to know about any other sources of information re NFPs?
The Secretary of State offices of many of the states are now online, many with the ability to search for basic corporation data by corporation name. Here is the Illinois search engine as an example. This information is usually more limited than you can find on the 990s. For-profit corporations don’t have to disclose their tax returns at all, so the availability of the 990s is really a boon.
If the NFP has issued tax-exempt bonds, it is required to disclose financial information to its rating agencies and sometimes other entities. There are fee-for-service databases of this information available through entities like Standard & Poor’s and IIRC The Bond Buyer.
Many of the larger NFPs have their own websites.
Almost anything is fair game for “managment services,” as llong as the price is fair. Many entities don’t have even a single employee–they “lease” their personnel from another entity pursuant to an agreement which pays the costs (including benefits) of the personnel but leaves the administrative work of payroll, benefits, withholding, etc. with the other entity. There are often legitimate reasons for global management contracts provided, again, that the fees paid are reasonable and not a sham for funnelling income to a private party.
Thanks for the kind words–they come at a good time since I’m feeling kinda slow today.
An update: We just signed a settlement agreement in the case for which I was requesting the above information. (I am an attorney.) The information in this thread was very very helpful in structuring the lawsuit and in negotiating the settlement. Thanks again for everyone’s help!!!
What kind of lawsuit? Were there some allegations of fraud or tax evasion?