Nonprofit Law/Owning a business and creating a non profit
State of NC
First I would like to thank you for volunteering in the community. I have a quick question, If someone owns a service business. Can they create a non profit entity that would help provide the services to a different group of people. When they complete the application with the sectary of state for the non profit business, can the owner of the business also be the principle agent creating the non profit entity and also a member on the board of directors for the non profit?
Last question, is the non profit able to fundraise and apply for grants to offer services for the business and use the for profit to supply the service?
Thank you for your time, I look forward to your response
The owner of a for-profit business can establish a 501(c)(3) organization and be the incorporator and registered agent and also a member of the board of directors for the nonprofit.
The nonprofit will be able to fundraise and apply for grants to offer services for the business and use the for-profit to supply the service, but the IRS may scrutinize the contract between the new entity.
The IRS has published at
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Where an exempt organization engages in a transaction with an
insider and there is a purpose to benefit the insider rather than
the organization, inurement occurs even though the transaction
ultimately proves profitable for the exempt organization. The test
is not ultimate profit or loss but whether, at every stage of the
transaction, those controlling the organization guarded its
interests and dealt with related parties at arm's-length.
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an organization may represent that services will be provided at a significant discount to the organization. When an organization contracts with interested board members, the circumstances may demonstrate that the organization does not have a purpose to benefit the insiders. Sales or services by the board members' businesses to an organization at a significant discount, at or
below cost, would help to justify the selection based on the economic benefit to the organization....Transactions at fair market value with board members may be allowed. But the determination to do business with a board member or other interested party with control must be made by an independent disinterested board. It is not unusual for a board member to offer his own business services to the organization. However, if the board member is not selected
by a disinterested board, then a transaction that would provide services even at low market rates is problematic.
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www.irs.gov/pub/irs-tege/eotopicb96.pdf on pages 22-23
I have in my profile that this free forum is only for general questions about IRS federal exemption issues of 501(c)(3) organizations. Your issues are also controlled by state law and states may differ somewhat with how they would treat such issues. Even though this forum is not for such state law issues, I may be able to direct you. Generally, under state law, the interested director should disclose to the Board the particular conflicts annually and before any vote and then should not vote in the matter, but I suggest you check your particular state's law as to the details. Chapter 55A of the North Carolina Code, the North Carolina
Nonprofit Corporation Act, on the law.onecle.com site is available
Harvey Mechanic, Attorney at Law -
P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.