Can my organization have a subsidiary?
Yes, a nonprofit organization may create a subsidiary with either a for-profit or a nonprofit structure. In some situations creating a subsidiary may make sense. If you think this is something your organization should do, please talk to an attorney familiar with both corporate and nonprofit law to fully understand the tax and legal implications.
For-profit subsidiaries of nonprofits
A nonprofit parent may establish a for-profit subsidiary because, for example, its leaders wish to engage in unrelated business activities that don't directly pertain to the stated mission of the nonprofit. Otherwise, the nonprofit may be required to pay an Unrelated Business Income Tax, commonly referred to as UBIT. A nonprofit may also create a for-profit subsidiary in order to avoid possible risk and liability that might be directed at the original organization if the activities were carried out under its tax-exempt status.
Nonprofit subsidiaries of nonprofits
In the case of nonprofit subsidiaries, these may be established in order to carry out activities that are significantly different from the original mission of the parent corporation.
When a for-profit organization chooses to create a nonprofit entity, the typical outcome is the creation of a corporate foundation, which is a totally separate, independent entity but which receives its principal endowment from the parent company. Corporate foundations typically award grants for charitable purposes to tax-exempt organizations with missions that the company supports. Learn more about corporate foundations
A for-profit corporation is less likely to create a nonprofit subsidiary that is not wholly independent from the parent. Legal conflicts of interest may arise if a 501(c)(3) tax exempt charity is associated with a for-profit parent because the charity must exist to benefit the greater public good, must be headed by an independent board of directors, and generally draw the bulk of their support from public sources. In order to stay on the straight and narrow with the IRS, an attorney familiar with both corporate and nonprofit law would have to be involved.
See our related Knowledge Base articles:
- How do I start a nonprofit organization?
- Can I convert my for-profit business into a nonprofit organization?
- What is earned income and how do I learn more about it?
- What is social enterprise?
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Explore resources curated by our staff for this topic:
Can a Nonprofit Have a For-profit Subsidiary?
Describes situations in which a nonprofit may form a separate for-profit subsidiary.
For-profit Subsidiaries of Tax-exempt Organizations
The IRS' advice on how to do it right.
Insight Center for Community Economic Development
Forming a Subsidiary of a Nonprofit, Charitable Tax-exempt Corporation
This document discusses the process of forming a subsidiary of a nonprofit.
Is it Time to Form a For-profit Subsidiary?
An unrelated business can be a great way to support your nonprofit, but not if the success of the business threatens a 501(c)(3) organization’s tax-exempt status. A taxable for-profit subsidiary may be the way to go.
Nonprofit Law Blog
Parent-Subsidiary Structures - Part I: Control and Separateness
Discusses reasons why a parent-subsidiary structure between a nonprofit and for-profit entity may be a good idea along with explanations of what control and separateness mean.
Business Law Today
Taking Care of Business: Use of a For-Profit Subsidiary by a Nonprofit Organization
Walks you through the many questions that need to be answered before you start a for-profit subsidiary of your nonprofit.
Nonprofit Law Blog
The Profitable Side of Nonprofits - Part II: Different Legal Structures
"What begins as a revenue generating idea for a nonprofit can sometimes develop into a larger endeavor, possibly requiring consideration of a subsidiary to house the planned activities. ..."
When Nonprofits Conduct Exempt Activities as Taxable Enterprises
A lengthy summary of a discussion of why more nonprofits are creating taxable subsidiaries. From a 2001 meeting of nonprofit experts.
Nonprofit Law Blog
When Should a 501(c)(3) Consider Creating an Affiliated 501(c)(4)?
501(c)(3)s are very limited in how much they can lobby or support a political campaign. An affiliated 501(c)(4) is not a subsidiary but may be a good option for some 501(c)(3)s.