Can a 501(c)(3) charitable nonprofit be sold to a for-profit business? If so, does the for-profit buy the entire 501(c)(3) exempt status? And if so, does the nonprofit then cease to exist? What happens to the proceeds from said sale? One member of our board thinks we divide the profits amongst the membership. Is this legal? Profits have never been shared with members before.
A for-profit would not normally want to buy a 501(c)(3) charitable organization because a for-profit’s principal purpose in life is to generate a profit for its shareholders. Even if the charity could generate a surplus (profit) from the provision of its services, it could not pass that surplus to the for-profit for the benefit of the for-profit’s shareholders. The money would be required to stay inside the (c)(3) organization under both federal and state law and be used exclusively for charitable purposes.
Traditionally, when a for-profit wants to buy the operations of a charity, it buys the assets of the charity and uses those assets to carry on its business. The great wave of “sales” of charitable hospitals to for-profit healthcare chains in the late 1990s and early 2000s were predominantly asset sales, in which the for-profit paid a lot of money to acquire the hospital buildings and real estate, its equipment, its inventory, its contracts and other assets in order to operate a for-profit hospital. The selling 501(c)(3) would normally then hold the cash and become a healthcare grantmaker for the community or dissolve and transfer the cash to a newly created foundation for similar purposes. There are hundreds of these so-called “conversion foundations” active in communities throughout the country today that obtained the bulk of their early money from the proceeds of the sale of the assets of a charitable hospital to a for-profit chain. (See Ready Reference Page: “Conversion Foundations Face Key Questions Early”)
You ask whether the proceeds could be shared with your members. The answer for a charitable organization is clearly “no.” The net remaining assets on the dissolution of a charity are required by federal tax law and probably by every state law to be devoted to charitable purposes, and lining the pockets of individual members is not considered charitable. That’s why so many conversion foundations have been created.
If you were a social club, the rules would be different. Social clubs on dissolution may divide the remaining assets among the members (after paying capital gains tax on whatever gain the club may have received on sale of its assets). But with a charity, there can be no such personal benefit.